Forecasting Based on Common Trends in Mixed Frequency Samples

Peter Fuleky and Carl Bonham

No 2010-17R1, Working Papers from University of Hawaii Economic Research Organization, University of Hawaii at Manoa

Abstract: We analyze the forecasting performance of small mixed frequency factor models when the observed variables share stochastic trends. The indicators are observed at various frequencies and are tied together by cointegration so that valuable high frequency information is passed to low frequency series through the common factors. Differencing the data breaks the cointegrating link among the series and some of the signal leaks out to the idiosyncratic components, which do not contribute to the transfer of information among indicators. We find that allowing for common trends improves forecasting performance over a stationary factor model based on differenced data. The "common-trends factor model" outperforms the stationary factor model at all analyzed forecast horizons. Our results demonstrate that when mixed frequency variables are cointegrated, modeling common stochastic trends improves forecasts.

Keywords: Dynamic Factor Model; Mixed Frequency Samples; Common Trends; Forecasting; Tourism Industry (search for similar items in EconPapers)
JEL-codes: C32 C53 E37 L83 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2010-12, Revised 2013-07
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Related works:
Working Paper: Forecasting Based on Common Trends in Mixed Frequency Samples (2011)
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