An Automatic Leading Indicator, Variable Reduction and Variable Selection Methods Using Small and Large Datasets: Forecasting the Industrial Production Growth for Euro Area Economies

quantf research Working Paper Series: WP09/2014

23 Pages Posted: 2 Jun 2014

See all articles by Gonzalo Camba-Mendez

Gonzalo Camba-Mendez

European Central Bank (ECB)

George Kapetanios

King's College, London

Fotis Papailias

Quantf Research; University of London, King's College London, Department of Management

Martin R. Weale

National Institute of Economic and Social Research (NIESR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2014

Abstract

This paper assesses the forecasting performance of various variable reduction and variable selection methods. A small and a large set of wisely chosen variables are used in forecasting the industrial production growth for four Euro Area economies. The results indicate that the Automatic Leading Indicator (ALI) model performs well compared to other variable reduction methods in small datasets. However, Partial Least Squares and variable selection using heuristic optimisations of information criteria along with the ALI could be used in model averaging methodologies.

Keywords: Bayesian Shrinkage Regression, Dynamic Factor Model, Euro Area, Forecasting, Kalman Filter, Partial Least Squares

Suggested Citation

Camba-Mendez, Gonzalo and Kapetanios, George and Papailias, Fotis and Weale, Martin R., An Automatic Leading Indicator, Variable Reduction and Variable Selection Methods Using Small and Large Datasets: Forecasting the Industrial Production Growth for Euro Area Economies (June 1, 2014). quantf research Working Paper Series: WP09/2014, Available at SSRN: https://ssrn.com/abstract=2444408 or http://dx.doi.org/10.2139/ssrn.2444408

Gonzalo Camba-Mendez

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

George Kapetanios

King's College, London ( email )

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

Fotis Papailias (Contact Author)

Quantf Research ( email )

London
United Kingdom

HOME PAGE: http://www.quantf.com

University of London, King's College London, Department of Management ( email )

150 Stamford Street
London, SE1 9NN
United Kingdom

Martin R. Weale

National Institute of Economic and Social Research (NIESR) ( email )

2 Dean Trench Street
Smith Square
London SW1P 3HE
United Kingdom

HOME PAGE: http://www.niesr.ac.uk/

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