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Forecasting Based on Common Trends in Mixed Frequency Samples

  • Peter Fuleky

    ()

    (University of Hawaii Economic Research Organization)

  • Carl Bonham

    ()

    (Department of Economics, University of Hawaii Economic Research Organization)

We analyze the forecasting performance of small mixed frequency factor models when the observed variables share stochastic trends. The indicators are observed at various frequencies and are tied together by cointegration so that valuable high frequency information is passed to low frequency series through the common factors. Differencing the data breaks the cointegrating link among the series and some of the signal leaks out to the idiosyncratic components, which do not contribute to the transfer of information among indicators. We find that allowing for common trends improves forecasting performance over a stationary factor model based on differenced data. The "common-trends factor model" outperforms the stationary factor model at all analyzed forecast horizons. Our results demonstrate that when mixed frequency variables are cointegrated, modeling common stochastic trends improves forecasts.

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File URL: http://www.uhero.hawaii.edu/assets/WP_2010-17R1.pdf
File Function: First version, 2010
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Paper provided by University of Hawaii Economic Research Organization, University of Hawaii at Manoa in its series Working Papers with number 2010-17R1.

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Length: 44 pages
Date of creation: Dec 2010
Date of revision: Jul 2013
Handle: RePEc:hae:wpaper:2010-17r1
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