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Forecasting using a large number of predictors: is Bayesian regression a valid alternative to principal components?

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  • De Mol, Christine
  • Giannone, Domenico
  • Reichlin, Lucrezia

Abstract

This paper considers Bayesian regression with normal and doubleexponential priors as forecasting methods based on large panels of time series. We show that, empirically, these forecasts are highly correlated with principal component forecasts and that they perform equally well for a wide range of prior choices. Moreover, we study the asymptotic properties of the Bayesian regression under Gaussian prior under the assumption that data are quasi collinear to establish a criterion for setting parameters in a large cross-section.

Suggested Citation

  • De Mol, Christine & Giannone, Domenico & Reichlin, Lucrezia, 2006. "Forecasting using a large number of predictors: is Bayesian regression a valid alternative to principal components?," Discussion Paper Series 1: Economic Studies 2006,32, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:5040
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    More about this item

    Keywords

    Bayesian VAR; ridge regression; Lasso regression; principal components; large cross-sections;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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