Factor forecasts for the UK
Article first published online: 28 JUN 2005
Copyright © 2005 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 24, Issue 4, pages 279–298, July 2005
How to Cite
Artis, M. J., Banerjee, A. and Marcellino, M. (2005), Factor forecasts for the UK. J. Forecast., 24: 279–298. doi: 10.1002/for.957
- Issue published online: 28 JUN 2005
- Article first published online: 28 JUN 2005
- factor models;
- time-series models
Data are now readily available for a very large number of macroeconomic variables that are potentially useful when forecasting. We argue that recent developments in the theory of dynamic factor models enable such large data sets to be summarized by relatively few estimated factors, which can then be used to improve forecast accuracy. In this paper we construct a large macroeconomic data set for the UK, with about 80 variables, model it using a dynamic factor model, and compare the resulting forecasts with those from a set of standard time-series models. We find that just six factors are sufficient to explain 50% of the variability of all the variables in the data set. These factors, which can be shown to be related to key variables in the economy, and their use leads to considerable improvements upon standard time-series benchmarks in terms of forecasting performance. Copyright © 2005 John Wiley & Sons, Ltd.