Forecasting with factor-augmented regression: A frequentist model averaging approach

Xu Cheng and Bruce Hansen ()

Journal of Econometrics, 2015, vol. 186, issue 2, 280-293

Abstract: This paper considers forecast combination with factor-augmented regression. In this framework, a large number of forecasting models are available, varying by the choice of factors and the number of lags. We investigate forecast combination across models using weights that minimize the Mallows and the leave-h-out cross validation criteria. The unobserved factor regressors are estimated by principle components of a large panel with N predictors over T periods. With these generated regressors, we show that the Mallows and leave-h-out cross validation criteria are asymptotically unbiased estimators of the one-step-ahead and multi-step-ahead mean squared forecast errors, respectively, provided that N,T→∞. (However, the paper does not establish any optimality properties for the methods.) In contrast to well-known results in the literature, this result suggests that the generated-regressor issue can be ignored for forecast combination, without restrictions on the relation between N and T.

Keywords: Cross-validation; Factor models; Forecast combination; Generated regressors; Mallows (search for similar items in EconPapers)
JEL-codes: C52 C53 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (81)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304407615000342
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Forecasting with Factor-Augmented Regression: A Frequentist Model Averaging Approach (2012)
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:econom:v:186:y:2015:i:2:p:280-293

DOI: 10.1016/j.jeconom.2015.02.010

Access Statistics for this article

Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

More articles in Journal of Econometrics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().