The Predictive Power of the Business and Bank Sentiment of Firms: A High-Dimensional Granger Causality Approach
26 Pages Posted: 4 Sep 2015
Date Written: 2015
We study the predictive power of industry-specific economic sentiment indicators for future macro-economic developments. In addition to the sentiment of firms towards their own business situation, we study their sentiment with respect to the banking sector - their main credit providers. The use of industry-specific sentiment indicators results in a high-dimensional forecasting problem. To identify the most predictive industries, we present a bootstrap Granger Causality test based on the Adaptive Lasso. This test is more powerful than the standard Wald test in such high-dimensional settings. Forecast accuracy is improved by using only the most predictive industries rather than all industries.
Keywords: Bootstrap; Granger Causality; Lasso; Sentiment surveys; Time series forecasting
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