DP6564 Comparing Alternative Predictors Based on Large-Panel Factor Models

Author(s): Antonello D Agostino , Domenico Giannone

Publication Date: November 2007

Keyword(s): Factor Models , Forecasting , Large Cross-Section

JEL(s): C31 , C52 , C53

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP6564.asp.asp

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. Our main conclusion is that for the dataset at hand the two methods have a similar performance and produce highly collinear forecasts.