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Forecasting With Many Predictors. An Empirical Comparison

Eliana González-Molano

BORRADORES DE ECONOMIA from BANCO DE LA REPÚBLICA

Abstract: Three methodologies of estimation of models with many predictors are implemented to forecast Colombian inflation. Two factor models, based on principal components, and partial least squares, as well as a Bayesian regression, known as Ridge regression are estimated. The methodologies are compared in terms of out-sample RMSE relative to two benchmark forecasts, a random walk and an autoregressive model. It was found, that the models that contain many predictors outperformed the benchmarks for most horizons up to 12 months ahead, however the reduction in RMSE is only statistically significant for the short run. Partial least squares outperformed the other approaches based on large datasets.

Keywords: Partial least squares; Principal components; Ridge regression. (search for similar items in EconPapers)
JEL-codes: C11 C15 C52 C53 (search for similar items in EconPapers)
Pages: 36
Date: 2011-02-17
New Economics Papers: this item is included in nep-cba, nep-for and nep-mac
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