A Scoring Rule for Factor and Autoregressive Models Under Misspecification

33 Pages Posted: 26 Jul 2018

See all articles by Roberto Casarin

Roberto Casarin

University Ca' Foscari of Venice - Department of Economics

Fausto Corradin

GRETA Associati

Francesco Ravazzolo

Free University of Bozen-Bolzano

Domenico Sartore

Ca Foscari University of Venice - Dipartimento di Economia

Date Written: July 22, 2018

Abstract

Factor models (FM) are now widely used for forecasting with large set of time series. Another class of models, which can be easily estimated and used in a large dimensional setting, is multivariate autoregressive models (MAR), where independent autoregressive processes are assumed for the series in the panel. We compare the forecasting abilities of FM and MAR models when assuming both models are misspecified and the data generating process is a vector autoregressive model. We establish which conditions need to be satisfied for a FM to overperform MAR in terms of mean square forecasting error. The condition indicates in presence of misspecification that FM is not always overperforming MAR and that the FM predictive performance depends crucially on the parameter values of the data generating process. Building on the theoretical relationship between FM and MAR predictive performances, we provide a scoring rule which can be evaluated on the data to either select the model, or combine the models in forecasting exercises. Some numerical illustrations are provided both on simulated data and on well-known large economic datasets. The empirical results show that the frequency of the true positive signals is larger when FM and MAR forecasting performances differ substantially and it decreases as the horizon increases.

Keywords: Factor models, Large datasets, Multivariate autoregressive models, Forecasting, Scoring rules, VAR models

JEL Classification: C32, C52, C53

Suggested Citation

Casarin, Roberto and Corradin, Fausto and Ravazzolo, Francesco and Sartore, Domenico, A Scoring Rule for Factor and Autoregressive Models Under Misspecification (July 22, 2018). Available at SSRN: https://ssrn.com/abstract=3219696 or http://dx.doi.org/10.2139/ssrn.3219696

Roberto Casarin (Contact Author)

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://sites.google.com/view/robertocasarin

Fausto Corradin

GRETA Associati ( email )

San Marco 3870
Venezia, 30124
Italy

Francesco Ravazzolo

Free University of Bozen-Bolzano ( email )

Sernesiplatz 1
Bozen-Bolzano, BZ 39100
Italy

Domenico Sartore

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

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