Comparing Alternative Predictors Based on Large-Panel Factor Models

49 Pages Posted: 26 Oct 2006

See all articles by Antonello D'Agostino

Antonello D'Agostino

European Stability Mechanism; Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department

Domenico Giannone

Federal Reserve Banks - Federal Reserve Bank of New York; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2006

Abstract

This paper compares the predictive ability of the factor models of Stock and Watson (2002) and Forni, Hallin, Lippi, and Reichlin (2005) using a large panel of US macroeconomic variables. We propose a nesting procedure of comparison that clarifies and partially overturns the results of similar exercises in the literature. As in Stock and Watson (2002), we find that efficiency improvements due to the weighting of the idiosyncratic components do not lead to significant more accurate forecasts. In contrast to Boivin and Ng (2005), we show that the dynamic restrictions imposed by the procedure of Forni, Hallin, Lippi, and Reichlin (2005) are not harmful for predictability. Our main conclusion is that for the dataset at hand the two methods have a similar performance and produce highly collinear forecasts.

Keywords: Factor models, forecasting, large cross-section

JEL Classification: C31, C52, C53

Suggested Citation

D'Agostino, Antonello and Giannone, Domenico, Comparing Alternative Predictors Based on Large-Panel Factor Models (October 2006). ECB Working Paper No. 680. Available at SSRN: https://ssrn.com/abstract=931648

Antonello D'Agostino (Contact Author)

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Central Bank and Financial Services Authority of Ireland - Economic Analysis and Research Department ( email )

Dame Street
P.O. Box 559
Dublin 2
Ireland

Domenico Giannone

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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