Dynamic Predictive Density Combinations for Large Data Sets in Economics and Finance

58 Pages Posted: 8 Aug 2015

See all articles by Roberto Casarin

Roberto Casarin

University Ca' Foscari of Venice - Department of Economics

Stefano Grassi

University of Kent - Canterbury Campus

Francesco Ravazzolo

Free University of Bolzano

H. K. van Dijk

Tinbergen Institute; Econometric Institute

Multiple version iconThere are 2 versions of this paper

Date Written: August 5, 2015

Abstract

A Bayesian nonparametric predictive model is introduced to construct time-varying weighted combinations of a large set of predictive densities. A clustering mechanism allocates these densities into a smaller number of mutually exclusive subsets. Using properties of the Aitchinson’s geometry of the simplex, combination weights are defined with a probabilistic interpretation. The class-preserving property of the logistic-normal distribution is used to define a compositional dynamic factor model for the weight dynamics with latent factors defined on a reduced dimension simplex. Groups of predictive models with combination weights are updated with parallel clustering and sequential Monte Carlo filters. The procedure is applied to predict Standard & Poor’s 500 index using more than 7000 predictive densities based on US individual stocks and finds substantial forecast and economic gains. Similar forecast gains are obtained in point and density forecasting of US real GDP, Inflation, Treasury Bill yield and employment using a large data set.

Keywords: Density Combination, Large Set of Predictive Densities, Compositional Factor Models, Nonlinear State Space, Bayesian Inference, GPU Computing

JEL Classification: C11, C15, C53, E37

Suggested Citation

Casarin, Roberto and Grassi, Stefano and Ravazzolo, Francesco and van Dijk, Herman K., Dynamic Predictive Density Combinations for Large Data Sets in Economics and Finance (August 5, 2015). Norges Bank Working Paper No. 12/2015. Available at SSRN: https://ssrn.com/abstract=2640942 or http://dx.doi.org/10.2139/ssrn.2640942

Roberto Casarin

University Ca' Foscari of Venice - Department of Economics ( email )

San Giobbe 873/b
Venice, 30121
Italy
+39 030.298.91.49 (Phone)
+39 030.298.88.37 (Fax)

HOME PAGE: http://venus.unive.it/r.casarin/

Stefano Grassi

University of Kent - Canterbury Campus ( email )

Keynes College
Canterbury, Kent CT2 7NP
United Kingdom

Francesco Ravazzolo (Contact Author)

Free University of Bolzano ( email )

Bolzano
Italy

Herman K. Van Dijk

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Burg. Oudlaan 50
Amsterdam/Rotterdam, 1082 MS
Netherlands
+31104088955 (Phone)
+31104089031 (Fax)

HOME PAGE: http://people.few.eur.nl/hkvandijk/

Econometric Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 4088955 (Phone)
+31 10 4527746 (Fax)

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