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
Date Written: May 28, 2012
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: Suggested Citation