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A scoring rule for factor and autoregressive models under misspecification

Roberto Casarin (), Fausto Corradin (), Francesco Ravazzolo () and Domenico Sartore ()
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Roberto Casarin: Department of Economics, University of Venice Cà Foscari
Fausto Corradin: Department of Economics, University of Venice Cà Foscari
Francesco Ravazzolo: Free University of Bozen-Bolzano
Domenico Sartore: Department of Economics, University of Venice Cà Foscari

No 2018:18, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: Factor models (FM) are now widely used for forecasting with large set of time series. Another class of models, which can be easily estimated and used in a large dimensional setting, is multivariate autoregressive models (MAR), where independent autoregressive processes are assumed for the series in the panel. We compare the forecasting abilities of FM and MAR models when assuming both models are misspecified and the data generating process is a vector autoregressive model. We establish which conditions need to be satisfied for a FM to overperform MAR in terms of mean square forecasting error. The condition indicates in presence of misspecification that FM is not always overperforming MAR and that the FM predictive performance depends crucially on the parameter values of the data generating process. Building on the theoretical relationship between FM and MAR predictive performances, we provide a scoring rule which can be evaluated on the data to either select the model, or combine the models in forecasting exercises. Some numerical illustrations are provided both on simulated data and on wel-known large economic datasets. The empirical results show that the frequency of the true positive signals is larger when FM and MAR forecasting performances differ substantially and it decreases as the horizon increases.

Keywords: Factor models; Large datasets; Multivariate autoregressive models; Forecasting; Scoring rules; VAR models. (search for similar items in EconPapers)
JEL-codes: C32 C52 C53 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
Date: 2018
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