Forecasting US Real Private Residential Fixed Investment Using a Large Number of Predictors

Goodness C. Aye, Rangan Gupta, Stephen Miller and Mehmet Balcilar
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Goodness C. Aye: University of Pretoria

No 2014-10, Working papers from University of Connecticut, Department of Economics

Abstract: This paper employs classical bivariate, factor augmented (FA), slab-and-spike variable selection (SSVS)-based, and Bayesian semi-parametric shrinkage (BSS)-based predictive regression models to forecast US real private residential fixed investment over an out-of-sample period from 1983:Q1 to 2011:Q2, based on an in-sample estimates for 1963:Q1 to 1982:Q4. Both large-scale (188 macroeconomic series) and small-scale (20 macroeconomic series) FA, SSVS, and BSS predictive regressions, as well as 20 bivariate regression models, capture the influence of fundamentals in forecasting residential investment. We evaluate the ex-post out-of-sample forecast performance of the 26 models using the relative average Mean Square Error for one-, two-, four-, and eight-quarters-ahead forecasts and test their significance based on the McCracken (2004, 2007) MSE-F statistic. We find that, on average, the SSVS-Large model provides the best forecasts amongst all the models. We also find that one of the individual regression models, using house for sale (H4SALE) as a predictor, performs best at the four- and eight-quarters-ahead horizons. Finally, we use these two models to predict the relevant turning points of the residential investment, via an ex-ante forecast exercise from 2011:Q3 to 2012:Q4. The SSVS-Large model forecasts the turning points more accurately, although the H4SALE model does better toward the end of the sample. Our results suggest that economy-wide factors, in addition to specific housing market variables, prove important when forecasting in the real estate market.

Keywords: Private residential investment; predictive regressions; factor-augmented models; Bayesian shrinkage; forecasting (search for similar items in EconPapers)
JEL-codes: C32 E22 E27 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2014-05
New Economics Papers: this item is included in nep-for, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Forecasting US real private residential fixed investment using a large number of predictors (2016)
Working Paper: Forecasting the US Real Private Residential Fixed Investment Using Large Number of Predictors (2013)
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