Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/80784
Authors: 
Godbout, Claudia
Lombardi, Marco J.
Year of Publication: 
2012
Series/Report no.: 
Bank of Canada Working Paper 2012-7
Abstract: 
While the usefulness of factor models has been acknowledged over recent years, little attention has been devoted to the forecasting power of these models for the Japanese economy. In this paper, we aim at assessing the relative performance of factor models over different samples, including the recent financial crisis. To do so, we construct factor models to forecast Japanese GDP and its subcomponents, using 38 data series (including daily, monthly and quarterly variables) over the period 1991 to 2010. Overall, we find that factor models perform well at tracking GDP movements and anticipating turning points. For most of the components, we report that factor models yield lower forecasting errors than a simple AR process or an indicator model based on Purchasing Managers' Indicators (PMIs). In line with previous studies, we conclude that the largest improvements in terms of forecasting accuracy are found for more volatile periods, such as the recent financial crisis. However, unlike previous studies, we do not find evident links between the volatility of the components and the relative advantage of using factor models. Finally, we show that adding the PMI index as an independent explanatory variable improves the forecasting properties of the factor models.
Subjects: 
Econometric and statistical methods
International topics
JEL: 
C50
C53
E37
E47
Document Type: 
Working Paper

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