Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153114
Authors: 
D’Agostino, Antonello
Giannone, Domenico
Year of Publication: 
2006
Series/Report no.: 
ECB Working Paper 680
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 effciency 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.
Subjects: 
Factor models
forecasting
Large Cross-Section
JEL: 
C31
C52
C53
Document Type: 
Working Paper

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