Structural modeling and forecasting using a cluster of dynamic factor models

Glocker, Christian and Kaniovski, Serguei (2020): Structural modeling and forecasting using a cluster of dynamic factor models.

Abstract

We propose a modeling approach involving a series of small-scale dynamic factor models. They are connected to each other within a cluster, whose linkages are derived from Granger-causality tests. This approach merges the benefits of large-scale macroeconomic and small-scale factor models, rendering our Cluster of Dynamic Factor Models (CDFM) useful for model-consistent nowcasting and forecasting on a larger scale. While the CDFM has a simple structure and is easy to replicate, its forecasts are more precise than those of a wide range of competing models and those of professional forecasters. Moreover, the CDFM allows forecasters to introduce their own judgment and hence produce conditional forecasts.

• Item Type: MPRA Paper
• Language: English
• Keywords: Forecasting, Dynamic factor model, Granger causality, Structural modeling
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C55 - Large Data Sets: Modeling and Analysis; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E37 - Forecasting and Simulation: Models and Applications

References

Aastveit, Knut, and T�rres Trovik (2012) `Nowcasting Norwegian GDP: The role of asset prices in a small open economy.' Empirical Economics 42(1), 95-119

Angelini, Elena, Gonzalo Camba-Mendez, Domenico Giannone, Lucrezia Reichlin, and Gerhard Rünstler (2011) `Short-term forecasts of euro area GDP growth.' Econometrics Journal 14(1), 25-44

Arnostova, Katerina, David Havrlant, Lubos Ruzicka, and Peter Toth (2011) `Short-term forecasting of Czech quarterly GDP using monthly indicators.' Czech Journal of Economics and Finance 61(6), 566-583

Aruoba, S. Boragan, Francis Diebold, and Chiara Scotti (2009) `Real-time measurement of business conditions.' Journal of Business & Economic Statistics 27(4), 417-427

Bai, Jushan, and Serena Ng (2002) `Determining the number of factors in approximate factor models.' Econometrica 70(1), 191-221

Banbura, Marta, and Gerhard Runstler (2011) `A look into the factor model black box: Publication lags and the role of hard and soft data in forecasting GDP.' International Journal of Forecasting 27(2), 333-346

Barhoumi, Karim, Gerhard Runstler, Riccardo Cristadoro, Ard Den Reijer, Audrone Jakaitiene, Piotr Jelonek, Antonio Rua, Karsten Ruth, Szilard Benk, and Christophe Van Nieuwenhuyze (2008) `Short-term forecasting of GDP using large monthly datasets: A pseudo real-time forecast evaluation exercise.' Working papers 215, Banque de France, July

Bell, Robert M., and Daniel McCarey (2002) `Bias reduction in standard errors for linear regression with multi-stage samples.' Survey Methodology 28, 169-181

Boivin, Jean, and Serena Ng (2006) `Are more data always better for factor analysis?' Journal of Econometrics 132(1), 169-194

Camacho, Maximo, and Agustin Garcia-Serrador (2014) `The Euro-Sting revisited: The usefulness of financial indicators to obtain Euro Area GDP forecasts.' Journal of Forecasting 33(3), 186-197

Camacho, Maximo, and Gabriel Perez-Quiros (2011) `Spain-sting: Spain short-term indicator of growth.' Manchester School 79(s1), 594-616

Clark, Todd (2004) `Can out-of-sample forecast comparisons help prevent overfitting?' Journal of Fore casting 23(2), 115-139

Diebold, Francis X., and Roberto S. Mariano (1995) `Comparing predictive accuracy.' Journal of Business & Economic Statistics 13(3), 253-263

Diron, Marie (2006) `Short-term forecasts of euro area real GDP growth: An assessment of real-time performance based on vintage data.' Working Paper Series 622, European Central Bank, May

Döpke, Jorg, Ulrich Fritsche, and Karsten Müller (2019) `Has macroeconomic forecasting changed after the Great Recession? Panel-based evidence on forecast accuracy and forecaster behavior from Germany.' Journal of Macroeconomics 62, 1-26

Durbin, James, and Siem Jan Koopman (2001) Time Series Analysis by State Space Methods (Oxford University Press)

Eurostat (2013) Handbook on quarterly national accounts (Luxembourg: Publications Office of the European Union)

Fildes, Robert, and Herman Stekler (2002) `The state of macroeconomic forecasting.' Journal of Macroeconomics 24(4), 435-468

Friesenbichler, Klaus S., and Christian Glocker (2019) `Tradability and productivity growth differentials across EU Member States.' Structural Change and Economic Dynamics 50, 1-13

Giannone, Domenico, Lucrezia Reichlin, and David Small (2008) `Nowcasting: The real-time informational content of macroeconomic data.' Journal of Monetary Economics 55(4), 665-676

Giovannelli, Alessandro, Tommaso Proietti, Ambra Citton, Ottavio Ricchi, Cristian Tegami, and Cristina Tinti (2020) `Nowcasting GDP and its components in a data-rich environment: The merits of the indirect approach.' CEIS Research Paper 489, Tor Vergata University, CEIS, May

Glocker, Christian, and Philipp Wegmueller (2020) `Business cycle dating and forecasting with real-time Swiss GDP data.' Empirical Economics 58(1), 73-105

Glocker, Christian, and Serguei Kaniovski (2014) `A financial market stress indicator for Austria.' Empirica 41(3), 481-504

Glocker, Christian, and Werner Hölzl (2019) `Assessing the Economic Content of Direct and Indirect Business Uncertainty Measures.' WIFO Working Papers 576, Austrian Institute of Economic Research

Granger, Clive, and Yongil Jeon (2004) `Forecasting performance of information criteria with many macro series.' Journal of Applied Statistics 31(10), 1227-1240

Hamilton, James D. (1994) Time Series Analysis (Princeton University Press)

Harvey, David, Stephen Leybourne, and Paul Newbold (1997) `Testing the equality of prediction mean squared errors.' International Journal of Forecasting 13(2), 281-291

Heinisch, Katja, and Rolf Scheufele (2018) `Bottom-up or direct? Forecasting German GDP in a data-rich environment.' Empirical Economics 54(2), 705-745

Higgins, Patrick C. (2014) `GDPNow: A model for GDP nowcasting.' FRB Atlanta Working Paper 2014-7, Federal Reserve Bank of Atlanta, July

Hwang, Youngjin (2019) `Forecasting recessions with time-varying models.' Journal of Macroeconomics 62, 1-26

Lehmann, Robert (2020) `Forecasting exports across Europe: What are the superior survey indicators?' Empirical Economics, forthcoming

Liu, Xiaochun (2019) `On tail fatness of macroeconomic dynamics.' Journal of Macroeconomics 62, 103-154

Loscos, Ana Gomez, Mercedes de Luis Lopez, Ana Arencibia Pareja, and Gabriel Perez-Quiros (2020) `A short-term forecasting model for the Spanish economy: GDP and its demand components.' Economia 43(85), 1-30

Marcellino, Massimiliano, and Christian Schumacher (2010) `Factor MIDAS for nowcasting and forecasting with ragged-edge data: A model comparison for German GDP.' Oxford Bulletin of Economics and Statistics 72(4), 518-550

Mariano, Roberto S., and Yasutomo Murasawa (2003) `A new coincident index of business cycles based on monthly and quarterly series.' Journal of Applied Econometrics 18(4), 427-443

Mathy, Gabriel, and Herman Stekler (2017) `Expectations and forecasting during the Great Depression: Real-time evidence from the business press.' Journal of Macroeconomics 53, 1-15

Modugno, Michele, Bars Soybilgen, and Ege Yazgan (2016) `Nowcasting Turkish GDP and news decomposition.' International Journal of Forecasting 32(4), 1369-1384

Pelaez, Rolando F. (2015) `A biannual recession-forecasting model.' Journal of Macroeconomics 45, 384-393

Rünstler, Gerhard, and Franck Sedillot (2003) `Short-term estimates of euro area real GDP by means of monthly data.' Working Paper Series 276, European Central Bank, September

Schreiber, Sven, and Natalia Soldatenkova (2016) `Anticipating business-cycle turning points in real time using density forecasts from a VAR.' Journal of Macroeconomics 47, 166-187

Schumacher, Christian, and Jörg Breitung (2008) `Real-time forecasting of German GDP based on a large factor model with monthly and quarterly data.' International Journal of Forecasting 24(3), 386-398

Stark, Tom, and Dean Croushore (2002) `Forecasting with a real-time data set for macroeconomists.' Journal of Macroeconomics 24(4), 507-531

Towbin, Pascal & Glocker, Christian (2015) `Reserve requirements as a macroprudential instrument – Empirical evidence from Brazil,' Journal of Macroeconomics, 44(C), 158-176.

van der Ploeg, Frederick (1982) `Reliability and the adjustment of sequences of large economic accounting matrices.' Journal of the Royal Statistical Society 145(2), 169-194

Wegmueller, Philipp & Glocker, Christian (2018) `International evidence of time-variation in trend labor productivity growth,' Economics Letters, 167(C), 115-119

van der Ploeg, Frederick (1985) `Econometrics and inconsistencies in the national accounts.' Economic Modelling 2(1), 8-16