Can we use seasonally adjusted indicators in dynamic factor models?

Maximo Camacho, Yuliya Lovcha () and Gabriel Perez-Quiros ()
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Gabriel Perez-Quiros: Banco de España
Authors registered in the RePEc Author Service: Gabriel Perez Quiros

No 1235, Working Papers from Banco de España

Abstract: We examine the short-term performance of two alternative approaches to forecasting using dynamic factor models. The first approach extracts the seasonal component of the individual indicators before estimating the dynamic factor model, while the alternative uses the nonseasonally adjusted data in a model that endogenously accounts for seasonal adjustment. Our Monte Carlo analysis reveals that the performance of the former is always comparable to or even better than that of the latter in all the simulated scenarios. Our results have important implications for the factor models literature because they show that the common practice of using seasonally adjusted data in this type of model is very accurate in terms of forecasting ability. Drawing on fi ve coincident indicators, we illustrate this result for US data

Keywords: Dynamic factor models; seasonal adjustment; short-term forecasting (search for similar items in EconPapers)
JEL-codes: C22 E27 E32 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012-10
New Economics Papers: this item is included in nep-ets and nep-for
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Working Paper: Can we use seasonally adjusted indicators in dynamic factor models? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1235

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