EconPapers    
Economics at your fingertips  
 

Improving forecast accuracy of financial vulnerability: PLS factor model approach

Hyeongwoo Kim () and Kyunghwan Ko

Economic Modelling, 2020, vol. 88, issue C, 341-355

Abstract: We present a factor augmented forecasting model for assessing the financial vulnerability in Korea. Dynamic factor models often extract latent common factors from a large panel of time series data via the method of the principal components (PC). Instead, we employ the partial least squares (PLS) method that estimates target specific common factors, utilizing covariances between predictors and the target variable. Applying PLS to 198 monthly frequency macroeconomic time series variables and the Bank of Korea's Financial Stress Index (KFSTI), our PLS factor augmented forecasting models consistently outperformed the random walk benchmark model in out-of-sample prediction exercises in all forecast horizons we considered. Our models also outperformed the autoregressive benchmark model in short-term forecast horizons. We expect our models would provide useful early warning signs of the emergence of systemic risks in Korea's financial markets.

Keywords: Partial least squares; Principal component analysis; Financial stress index; Out-of-sample forecast; RRMSPE (search for similar items in EconPapers)
JEL-codes: C38 C53 C55 E44 E47 G01 G17 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999318314457
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Improving Forecast Accuracy of Financial Vulnerability: PLS Factor Model Approach (2019) Downloads
Working Paper: Improving Forecast Accuracy of Financial Vulnerability: PLS Factor Model Approach (2018) Downloads
Working Paper: Improving Forecast Accuracy of Financial Vulnerability: PLS Factor Model Approach (2017) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:88:y:2020:i:c:p:341-355

DOI: 10.1016/j.econmod.2019.09.046

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2025-03-23
Handle: RePEc:eee:ecmode:v:88:y:2020:i:c:p:341-355