Alternative Weighting Approaches to Computing Indexes of Economic Activity

14 Pages Posted: 20 Mar 2015

See all articles by G.C. LIM

G.C. LIM

University of Melbourne

Viet Hoang Nguyen

Melbourne Institute of Applied Economic and Social Research

Date Written: April 2015

Abstract

This paper compares the weighting schemes in the traditional, principal component and dynamic factor approaches to summarizing information from a number of component variables. To facilitate the comparison, we propose a framework to discuss the approaches with respect to their implied loadings in a latent variable model. We also propose a way to transform the dynamic factor index into an analogous index which is a weighted average of the components. The framework shows the strengths and weakness of the alternative weighting schemes and the sense in which the dynamic factor approach has the advantage of capturing both the significance and the variability of the components.

Keywords: Indexes of economic activity, Latent factor, Weighting scheme

Suggested Citation

LIM, G.C. and Nguyen, Viet Hoang, Alternative Weighting Approaches to Computing Indexes of Economic Activity (April 2015). Journal of Economic Surveys, Vol. 29, Issue 2, pp. 287-300, 2015. Available at SSRN: https://ssrn.com/abstract=2581256 or http://dx.doi.org/10.1111/joes.12053

G.C. LIM (Contact Author)

University of Melbourne

Viet Hoang Nguyen

Melbourne Institute of Applied Economic and Social Research ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

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