Nowcasting Emerging Market’s GDP: The Importance of Dimension Reduction Techniques

Applied Economics Letters, Forthcoming

10 Pages Posted: 14 Feb 2019

See all articles by Oguzhan Cepni

Oguzhan Cepni

Government of the Republic of Turkey - Central Bank of the Republic of Turkey

Ibrahim Guney

Government of the Republic of Turkey - Central Bank of the Republic of Turkey

Date Written: February 5, 2019

Abstract

A number of recent studies in the macro-finance literature that addresses the link between asset prices and economic fluctuations have focused on the usefulness of various factor models in the context of now-casting using very big dataset. The issue of factor extraction is usually swept under the carpet in the factor model literature, where it seems that all that is needed is a large number of economic and financial variables. We contribute to this literature by analyzing whether factor estimation methods matters for the performance of factor-based now-casting models based on selected emerging markets GDP. Ancillary findings based on our GDP now-casting experiments on major emerging market countries underscore the advantage of sparse principal component analysis based factor estimation approach. These results show that imposing a sparse structure on the whole dataset is generally a useful step towards reducing the forecast errors in the context of GDP now-casting model specification.

Keywords: Diffusion index, Factor extraction methods, Emerging markets, Factor model, Forecasting

JEL Classification: C53; C61; E37

Suggested Citation

Cepni, Oguzhan and Guney, Ibrahim, Nowcasting Emerging Market’s GDP: The Importance of Dimension Reduction Techniques (February 5, 2019). Applied Economics Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3329543

Oguzhan Cepni

Government of the Republic of Turkey - Central Bank of the Republic of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

Ibrahim Guney (Contact Author)

Government of the Republic of Turkey - Central Bank of the Republic of Turkey ( email )

Istiklal Cad. 10 Ulus
06100 Ankara, Ankara 06050
Turkey

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