Can We Use Seasonally Adjusted Indicators in Dynamic Factor Models?

33 Pages Posted: 11 Oct 2012

See all articles by Maximo Camacho

Maximo Camacho

Autonomous University of Barcelona - Department of Economics; Universidad de Murcia - Departamento de Metodos Cuantitativos

Gabriel Perez-Quiros

Banco de España

Yuliya Yuliya Lovcha

University of Navarra

Date Written: October 10, 2012

Abstract

We examine the short-term performance of two alternative approaches to forecasting using dynamic factor models. The first approach extracts the seasonal component of the individual indicators before estimating the dynamic factor model, while the alternative uses the non-seasonally adjusted data in a model that endogenously accounts for seasonal adjustment. Our Monte Carlo analysis reveals that the performance of the former is always comparable to or even better than that of the latter in all the simulated scenarios. Our results have important implications for the factor models literature because they show that the common practice of using seasonally adjusted data in this type of model is very accurate in terms of forecasting ability. Drawing on five coincident indicators, we illustrate this result for US data.

Keywords: dynamic factor models, seasonal adjustment, short-term forecasting

JEL Classification: E32, C22, E27

Suggested Citation

Camacho, Maximo and Perez-Quiros, Gabriel and Yuliya Lovcha, Yuliya, Can We Use Seasonally Adjusted Indicators in Dynamic Factor Models? (October 10, 2012). Banco de Espana Working Paper No. 1235, Available at SSRN: https://ssrn.com/abstract=2159652 or http://dx.doi.org/10.2139/ssrn.2159652

Maximo Camacho (Contact Author)

Autonomous University of Barcelona - Department of Economics ( email )

Avda. Diagonal 690
Barcelona, 08034
Spain

Universidad de Murcia - Departamento de Metodos Cuantitativos ( email )

Campus de Espinardo
30100 Murcia
Spain
+34 968 367 982 (Phone)

Gabriel Perez-Quiros

Banco de España ( email )

Madrid 28014
Spain

Yuliya Yuliya Lovcha

University of Navarra ( email )

Camino del Cerro del Aguila, 3
Pamplona, Navarra 31080
Spain

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