Uncertainty and Heterogeneity in Factor Models Forecasting

Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 5

28 Pages Posted: 1 Jun 2012 Last revised: 31 Jul 2012

See all articles by Matteo Luciani

Matteo Luciani

Board of Governors of the Federal Reserve System

Libero Monteforte

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: May 28, 2012

Abstract

In this paper we propose to exploit the heterogeneity of forecasts produced by different model specifications to measure forecast uncertainty. Our approach is simple and intuitive.

It consists in selecting all the models that outperform some benchmark model, and then to construct an empirical distribution of the forecasts produced by these models. We interpret this distribution as a measure of uncertainty. We perform a pseudo real-time forecasting exercise on a large database of Italian data from 1982 to 2009, showing case studies of our measure of uncertainty.

Keywords: Factor Models, Model Uncertainty, Forecast Combination, Density Forecast

JEL Classification: C13, C32, C33, C52, C53

Suggested Citation

Luciani, Matteo and Monteforte, Libero, Uncertainty and Heterogeneity in Factor Models Forecasting (May 28, 2012). Government of the Italian Republic (Italy), Ministry of Economy and Finance, Department of the Treasury Working Paper No. 5, Available at SSRN: https://ssrn.com/abstract=2071222

Matteo Luciani (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Libero Monteforte

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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