Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan

Mototsugu Shintani

No 322, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: This paper extends the diffusion index (DI) forecast approach of Stock and Watson (1998, 2002) to the case of possibly nonlinear dynamic factor models. When the number of series is large, a two-step procedure based on the principal components method is useful since it allows the wide variety of the nonlinearity in the factors. The factors extracted from a large Japanese data suggest some evidence of nonlinear structure. Furthermore, both the linear and nonlinear DI forecasts in Japan outperform traditional time series forecasts, while the linear DI forecast, in most cases, performs as well as the nonlinear DI forecast.

Keywords: Diffusion Index; Dynamic Factor Model; Nonlinearity; Prediction (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Date: 2003-10, Revised 2004-04
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-fin and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.accessecon.com/pubs/VUECON/vu03-w22R.pdf Revised version, 2004 (application/pdf)

Related works:
Working Paper: Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan (2010)
Journal Article: Nonlinear Forecasting Analysis Using Diffusion Indexes: An Application to Japan (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0322

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