Estimating Large-Scale Factor Models for Economic Activity In Germany: Do They Outperform Simpler Models?
28 Pages Posted: 3 Feb 2003
Date Written: 2002
This paper discusses a large-scale factor model for the German economy. Following the recent literature, a data set of 121 time series is used via principal component analysis to determine the factors, which enter a dynamic model for German GDP. The model is compared with alternative univariate and multivariate models. These models are based on regression techniques and considerably smaller data sets. Out-of-sample forecasts show that the prediction errors of the factor model are smaller than the errors of the rival models. However, these advantages are not statistically significant, as a test for equal forecast accuracy shows. Therefore, the effciency gains of using a large data set with this kind of factor models seem to be limited.
Keywords: Factor models, Principal components, forecasting accuracy
JEL Classification: E32, C51, C43
Suggested Citation: Suggested Citation