Professor of Economics - London Business School
The Generalised Dynamic Factor Model: One Sided Estimation and Forecasting
Reichlin, L., Forni, M., Hallin, M., Lippi, M.
Date Published: 01/09/2005
This paper proposes a new forecasting method which makes use of information from a large panel of time series. As in Forni, Hallin, Lippi and Reichlin (2000), and in Stock and Watson (2002a,b), the method is based on a dynamic factor model. We argue that our method improves upon a standard principal component predictor in that, first, it fully exploits all the dynamic covariance structure of the panel and, second, it weights the variables according to their estimated signal-to-noise ratio. We provide asymptotic results for our optimal forecast estimator and show that in finite samples our forecast outperforms the standard principal components predictor.
Reichlin, L., Forni, M., Hallin, M., Lippi, M., "The Generalised Dynamic Factor Model: One Sided Estimation and Forecasting", Journal of the American Statistical Association, Vol. 100, No. 471, September 2005 pp.830-840 (11)
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