Camba-Méndez, Gonzalo Kapetanios, George Papailias, Fotis Weale, Martin R.
Year of Publication:
ECB Working Paper 1773
This paper assesses the forecasting performance of various variable reduction and variable selection methods. A small and a large set of wisely chosen variables are used in forecasting the industrial production growth for four Euro Area economies. The results indicate that the Automatic Leading Indicator (ALI) model performs well compared to other variable reduction methods in small datasets. However, Partial Least Squares and variable selection using heuristic optimisations of information criteria along with the ALI could be used in model averaging methodologies.
Bayesian shrinkage regression dynamic factor model euro area forecasting Kalman filter partial least squares