Time series forecasting by principal covariate regression
This paper is concerned with time series forecasting in the presence of a large number of predictors. The results are of interest, for instance, in macroeconomic and financial forecasting where often many potential predictor variables are available. Most of the current forecast methods with many predictors consist of two steps, where the large set of predictors is first summarized by means of a limited number of factors -for instance, principal components- and, in a second step, these factors and their lags are used for forecasting. A possible disadvantage of these methods is that the construction of the components in the first step is not directly related to their use in forecasting in the second step. This motivates an alternative method, principal covariate regression (PCovR), where the two steps are combined in a single criterion. This method has been analyzed before within the framework of multivariate regression models. Moti- vated by the needs of macroeconomic time series forecasting, this paper discusses two adjustments of standard PCovR that are necessary to allow for lagged factors and for preferential predictors. The resulting nonlinear estimation problem is solved by means of a method based on iterative majorization. The paper discusses some numerical aspects and analyzes the method by means of simulations. Further, the empirical per- formance of PCovR is compared with that of the two-step principal component method by applying both methods to forecast four US macroeconomic time series from a set of 132 predictors, using the data set of Stock and Watson (2005).
|Date of creation:||31 Aug 2006|
|Date of revision:|
|Contact details of provider:|| Postal: Postbus 1738, 3000 DR Rotterdam|
Phone: 31 10 4081111
Web page: http://www.eur.nl/ese
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000.
"The generalised dynamic factor model: identification and estimation,"
ULB Institutional Repository
2013/10143, ULB -- Universite Libre de Bruxelles.
- Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
- Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
- Jushan Bai & Serena Ng, 2000.
"Determining the Number of Factors in Approximate Factor Models,"
Boston College Working Papers in Economics
440, Boston College Department of Economics.
- Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
- Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
- Francis X. Diebold & Robert S. Mariano, 1994.
"Comparing Predictive Accuracy,"
NBER Technical Working Papers
0169, National Bureau of Economic Research, Inc.
- Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
- Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
- Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2003.
"Do financial variables help forecasting inflation and real activity in the euro area?,"
Journal of Monetary Economics,
Elsevier, vol. 50(6), pages 1243-1255, September.
- Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2002. "Do Financial Variables Help Forecasting Inflation and Real Activity in the Euro Area?," CEPR Discussion Papers 3146, C.E.P.R. Discussion Papers.
- Marc Hallin & Mario Forni & Marco Lippi & Lucrezia Reichlin, 2003. "Do financial variables help forecasting inflation and real activity in the Euro area ?," ULB Institutional Repository 2013/2123, ULB -- Universite Libre de Bruxelles.
- Hansen, Bruce E., 2005. "Challenges For Econometric Model Selection," Econometric Theory, Cambridge University Press, vol. 21(01), pages 60-68, February.
- Peter C.B. Phillips, 2004.
"Automated Discovery in Econometrics,"
Cowles Foundation Discussion Papers
1469, Cowles Foundation for Research in Economics, Yale University.
- Racine, Jeff, 2000. "Consistent cross-validatory model-selection for dependent data: hv-block cross-validation," Journal of Econometrics, Elsevier, vol. 99(1), pages 39-61, November.
- Boivin, Jean & Ng, Serena, 2006.
"Are more data always better for factor analysis?,"
Journal of Econometrics,
Elsevier, vol. 132(1), pages 169-194, May.
- Henk Kiers, 1990. "Majorization as a tool for optimizing a class of matrix functions," Psychometrika, Springer;The Psychometric Society, vol. 55(3), pages 417-428, September.
When requesting a correction, please mention this item's handle: RePEc:ems:eureir:8003. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RePub)
If references are entirely missing, you can add them using this form.