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Real-Time Factor Model Forecasting and the Effects of Instability

Michael Clements

No icma-dp2014-05, ICMA Centre Discussion Papers in Finance from Henley Business School, Reading University

Abstract: We show that factor forecasting models deliver real-time gains over autoregressive models for US real activity variables during the recent period, but are less successful for nominal variables. The gains are largely due to the Financial Crisis period, and are primarily at the shortest (one quarter ahead) horizon. Excluding the pre-Great Moderation years from the factor forecasting model estimation period (but not from the data used to extract factors) results in a marked fillip in factor model forecast accuracy, but does the same for the AR model forecasts. The relative performance of the factor models compared to the AR models is largely unaffected by whether the exercise is in real time or is pseudo out-of-sample.

Keywords: Factor Models; Robust Approaches; Financial Crisis (search for similar items in EconPapers)
JEL-codes: C51 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-for
Date: 2014-05
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Journal Article: Real-time factor model forecasting and the effects of instability (2016) Downloads
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