Sparse structures with LASSO through principal components: Forecasting GDP components in the short-run
Dmitrij Celov and
International Journal of Forecasting, 2021, vol. 37, issue 2, 759-776
This paper examines the use of sparse methods to forecast the real (in the chain-linked volume sense) expenditure components of the US and EU GDP in the short-run sooner than national statistics institutions officially release the data. We estimate current-quarter nowcasts, along with one- and two-quarter forecasts, by bridging quarterly data with available monthly information announced with a much smaller delay. We solve the high-dimensionality problem of monthly datasets by assuming sparse structures of leading indicators capable of adequately explaining the dynamics of the analyzed data. For variable selection and estimation of the forecasts, we use LASSO together with its recent modifications. We propose an adjustment that combines LASSO cases with principal components analysis to improve the forecasting performance. We evaluated the forecasting performance by conducting pseudo-real-time experiments for gross fixed capital formation, private consumption, imports, and exports over a sample from 2005–2019, compared with benchmark ARMA and factor models. The main results suggest that sparse methods can outperform the benchmarks and identify reasonable subsets of explanatory variables. The proposed combination of LASSO and principal components further improves the forecast accuracy.
Keywords: Nowcasting; LASSO; Adaptive LASSO; Relaxed LASSO; Principal components analysis; Variable selection; GDP components (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:37:y:2021:i:2:p:759-776
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