Forecasting Using a Large Number of Predictors: Is Bayesian Regression a Valid Alternative to Principal Components?

29 Pages Posted: 10 Nov 2006

See all articles by Christine De Mol

Christine De Mol

Free University of Brussels (VUB/ULB) - European Center for Advanced Research in Economics and Statistics (ECARES)

Domenico Giannone

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

Lucrezia Reichlin

London Business School; Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); Centre for Economic Policy Research (CEPR); European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2006

Abstract

This paper considers Bayesian regression with normal and double exponential priors as forecasting methods based on large panels of time series. We show that, empirically, these forecasts are highly correlated with principal component forecasts and that they perform equally well for a wide range of prior choices. Moreover, we study the asymptotic properties of the Bayesian regression under Gaussian prior under the assumption that data are quasi collinear to establish a criterion for setting parameters in a large cross-section.

Keywords: Bayesian VAR, ridge regressions, Lasso regression, principal components, large cross-sections

JEL Classification: C11, C13, C33, C53

Suggested Citation

De Mol, Christine and Giannone, Domenico and Reichlin, Lucrezia, Forecasting Using a Large Number of Predictors: Is Bayesian Regression a Valid Alternative to Principal Components? (September 2006). CEPR Discussion Paper No. 5829. Available at SSRN: https://ssrn.com/abstract=944051

Christine De Mol

Free University of Brussels (VUB/ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium

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

Lucrezia Reichlin (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES) ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
Brussels, B-1050
Belgium
+32 2 650 4221 (Phone)
+32 2 650 4475 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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