The Cyclical Component Factor Model

CREATES Research Paper No. 2008-44

16 Pages Posted: 2 Sep 2008

See all articles by Christian M. Dahl

Christian M. Dahl

Department of Business and Economics

Henrik Hansen

Institute of Food and Resource Economics

John Smidt

affiliation not provided to SSRN

Date Written: September 2, 2008

Abstract

Forecasting using factor models based on large data sets have received ample attention due to the models' ability to increase forecast accuracy with respect to a range of key macroeconomic variables in the US and the UK. However, forecasts based on such factor models do not uniformly outperform the simple autoregressive model when using data from other countries. In this paper we propose to estimate the factors based on the pure cyclical components of the series entering the large data set. Monte Carlo evidence and an empirical illustration using Danish data shows that this procedure can indeed improve on pseudo real time forecast accuracy.

Keywords: Factor model, Cyclical components, Estimation, Real time forecasting

JEL Classification: C13, C22, C52, G53

Suggested Citation

Dahl, Christian M. and Hansen, Henrik and Smidt, John, The Cyclical Component Factor Model (September 2, 2008). CREATES Research Paper No. 2008-44. Available at SSRN: https://ssrn.com/abstract=1262225 or http://dx.doi.org/10.2139/ssrn.1262225

Christian M. Dahl (Contact Author)

Department of Business and Economics ( email )

Campusvej 55
DK-5230 Odense M
Denmark
29125486 (Phone)

Henrik Hansen

Institute of Food and Resource Economics ( email )

Rolighedsvej 25
Frederiksberg C, 1958
Denmark
+45 3528 6840 (Phone)

John Smidt

affiliation not provided to SSRN ( email )

Register to save articles to
your library

Register

Paper statistics

Downloads
46
Abstract Views
1,143
PlumX Metrics