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Forecasting by factors, by variables, by both or neither?
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Castle, Jennifer L., Clements, Michael P. and Hendry, David F. (2013) Forecasting by factors, by variables, by both or neither? Journal of Econometrics, Volume 177 (Number 2). pp. 305-319. doi:10.1016/j.jeconom.2013.04.015 ISSN 0304-4076.
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Official URL: http://dx.doi.org/10.1016/j.jeconom.2013.04.015
Abstract
We consider forecasting with factors, variables and both, modeling in-sample using Autometrics so all principal components and variables can be included jointly, while tackling multiple breaks by impulse-indicator saturation. A forecast-error taxonomy for factor models highlights the impacts of location shifts on forecast-error biases. Forecasting US GDP over 1-, 4- and 8-step horizons using the dataset from Stock and Watson (2009) updated to 2011:2 shows factor models are more useful for nowcasting or short-term forecasting, but their relative performance declines as the forecast horizon increases. Forecasts for GDP levels highlight the need for robust strategies, such as intercept corrections or differencing, when location shifts occur as in the recent financial crisis.
Item Type: | Journal Article | ||||
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Subjects: | H Social Sciences > HB Economic Theory | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Economic forecasting -- Econometric models | ||||
Journal or Publication Title: | Journal of Econometrics | ||||
Publisher: | Elsevier BV * North-Holland | ||||
ISSN: | 0304-4076 | ||||
Official Date: | 2013 | ||||
Dates: |
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Volume: | Volume 177 | ||||
Number: | Number 2 | ||||
Page Range: | pp. 305-319 | ||||
DOI: | 10.1016/j.jeconom.2013.04.015 | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access | ||||
Funder: | Open Society Foundations, Oxford Martin School |
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