Forecasting Large Datasets with Bayesian Reduced Rank Multivariate Models

36 Pages Posted: 7 Oct 2009

See all articles by Andrea Carriero

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

George Kapetanios

King's College, London

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: September 2009

Abstract

The paper addresses the issue of forecasting a large set of variables using multivariate models. In particular, we propose three alternative reduced rank forecasting models and compare their predictive performance for US time series with the most promising existing alternatives, namely, factor models, large scale Bayesian VARs, and multivariate boosting. Specifically, we focus on classical reduced rank regression, a two-step procedure that applies, in turn, shrinkage and reduced rank restrictions, and the reduced rank Bayesian VAR of Geweke (1996). We find that using shrinkage and rank reduction in combination rather than separately improves substantially the accuracy of forecasts, both when the whole set of variables is to be forecast, and for key variables such as industrial production growth, inflation, and the federal funds rate. The robustness of this finding is confirmed by a Monte Carlo experiment based on bootstrapped data. We also provide a consistency result for the reduced rank regression valid when the dimension of the system tends to infinity, which opens the ground to use large scale reduced rank models for empirical analysis.

Keywords: Bayesian VARs, factor models, forecasting, reduced rank

JEL Classification: C11, C13, C33, C53

Suggested Citation

Carriero, Andrea and Kapetanios, George and Marcellino, Massimiliano, Forecasting Large Datasets with Bayesian Reduced Rank Multivariate Models (September 2009). CEPR Discussion Paper No. DP7446, Available at SSRN: https://ssrn.com/abstract=1484479

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy
(39 02) 5836 3300 (Phone)
(39 02) 5836 3302 (Fax)

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

Massimiliano Marcellino (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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