Comparing Alternative Predictors Based on Large-Panel Factor Models
38 Pages Posted: 6 Jun 2008
Date Written: November 2007
This paper compares the predictive ability of the factor models of Stock and Watson (2002) and Forni, Hallin, Lippi, and Reichlin (2005) using a large panel of US macroeconomic variables. We propose a nesting procedure of comparison that clarifies and partially overturns the results of similar exercises in the literature. Our main conclusion is that for the dataset at hand the two methods have a similar performance and produce highly collinear forecasts.
Keywords: Factor Models, Forecasting, Large Cross-Section
JEL Classification: C31, C52, C53
Suggested Citation: Suggested Citation