Economic Predictions with Big Data: The Illusion of Sparsity

29 Pages Posted: 7 May 2018

See all articles by Domenico Giannone

Domenico Giannone

Centre for Economic Policy Research (CEPR); Amazon.com

Michele Lenza

European Central Bank (ECB)

Giorgio E. Primiceri

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: April , 2018

Abstract

We compare sparse and dense representations of predictive models in macroeconomics, microeconomics, and finance. To deal with a large number of possible predictors, we specify a prior that allows for both variable selection and shrinkage. The posterior distribution does not typically concentrate on a single sparse or dense model, but on a wide set of models. A clearer pattern of sparsity can only emerge when models of very low dimension are strongly favored a priori.

Keywords: model selection, shrinkage, high dimensional data

JEL Classification: C11, C53, C55

Suggested Citation

Giannone, Domenico and Lenza, Michele and Primiceri, Giorgio E., Economic Predictions with Big Data: The Illusion of Sparsity (April , 2018). FRB of New York Staff Report No. 847, Available at SSRN: https://ssrn.com/abstract=3166281 or http://dx.doi.org/10.2139/ssrn.3166281

Domenico Giannone (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Amazon.com ( email )

Seattle, WA 98144
United States

Michele Lenza

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Giorgio E. Primiceri

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

HOME PAGE: http://faculty.econ.northwestern.edu/faculty/primiceri

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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