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Forecasting Based on Common Trends in Mixed Frequency Samples

Author

Listed:
  • Peter Fuleky

    (UHERO and Department of Economics, University of Hawaii)

  • Carl S. Bonham

    (UHERO and Department of Economics, University of Hawaii)

Abstract

We extend the existing literature on small mixed frequency single factor models by allowing for multiple factors, considering indicators in levels, and allowing for cointegration among the indicators. We capture the cointegrating relationships among the indicators by common factors modeled as stochastic trends. We show that the stationary single-factor model frequently used in the literature is misspecified if the data set contains common stochastic trends. We find that taking advantage of common stochastic trends improves forecasting performance over a stationary single-factor model. The common-trends factor model outperforms the stationary single-factor model at all analyzed forecast horizons on a root mean squared error basis. Our results suggest that when the constituent indicators are integrated and cointegrated, modeling common stochastic trends, as opposed to eliminating them, will improve forecasts.

Suggested Citation

  • Peter Fuleky & Carl S. Bonham, 2011. "Forecasting Based on Common Trends in Mixed Frequency Samples," Working Papers 201110, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:201110
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    More about this item

    Keywords

    Dynamic Factor Model; Mixed Frequency Samples; Common Trends; Forecasting; Tourism Industry;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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