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Forecasting US Real Private Residential Fixed Investment Using a Large Number of Predictors

Listed author(s):
  • Goodness C. Aye

    (University of Pretoria)

  • Rangan Gupta

    (University of Pretoria)

  • Stephen M. Miller

    (University of Nevada, Las Vegas and University of Connecticut)

  • Mehmet Balcilar

    (Eastern Mediterranean University)

This paper employs classical bivariate, factor augmented (FA), slab-and-spike variable selection (SSVS)-based, and Bayesian semi-parametric shrinkage (BSS)-based predictive regression models to forecast US real private residential fixed investment over an out-of-sample period from 1983:Q1 to 2011:Q2, based on an in-sample estimates for 1963:Q1 to 1982:Q4. Both large-scale (188 macroeconomic series) and small-scale (20 macroeconomic series) FA, SSVS, and BSS predictive regressions, as well as 20 bivariate regression models, capture the influence of fundamentals in forecasting residential investment. We evaluate the ex-post out-of-sample forecast performance of the 26 models using the relative average Mean Square Error for one-, two-, four-, and eight-quarters-ahead forecasts and test their significance based on the McCracken (2004, 2007) MSE-F statistic. We find that, on average, the SSVS-Large model provides the best forecasts amongst all the models. We also find that one of the individual regression models, using house for sale (H4SALE) as a predictor, performs best at the four- and eight-quarters-ahead horizons. Finally, we use these two models to predict the relevant turning points of the residential investment, via an ex-ante forecast exercise from 2011:Q3 to 2012:Q4. The SSVS-Large model forecasts the turning points more accurately, although the H4SALE model does better toward the end of the sample. Our results suggest that economy-wide factors, in addition to specific housing market variables, prove important when forecasting in the real estate market.

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File URL: http://web2.uconn.edu/economics/working/2014-10.pdf
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2014-10.

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Length: 26 pages
Date of creation: May 2014
Handle: RePEc:uct:uconnp:2014-10
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Web page: http://www.econ.uconn.edu/

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