Factor MIDAS for Nowcasting and Forecasting with Ragged-Edge Data: A Model Comparison for German GDP


  • The authors are grateful for helpful comments and discussions to three anonymous referees, Riccardo Cristadoro, Sandra Eickmeier, Petra Gerlach-Kristen, Malte Knüppel, Gerhard Rünstler, Karsten Ruth, Klaus Wohlrabe and participants at the Bank of England CCBS research forum ‘New Developments in Dynamic Factor Modelling’ 2007, the Workshop ‘Forecasting Short-Term Developments and the Role of Econometric Models’ at the Bank of Canada 2007, the Pfingsttagung of the DStatG 2008, the Annual Conference of the Verein für Socialpolitik 2008, the Joint Research Workshop OeNB-SNB-Bbk 2008, the Workshop ‘Forecasting Macroeconomic Variables Using Dynamic Factor Models’ at the Banque de France 2008, the CFE Workshop 2008 in Neuchatel and a seminar at the Bundesbank. The codes for this article were written in Matlab. Some functions were taken from the Econometrics Toolbox written by James P. LeSage from http://www.spatial-econometrics.com. Other codes were kindly provided by Mario Forni from http://www.economia.unimore.it/forni_mario/matlab.htm, Arthur Sinko from http://www.unc.edu/~sinko/midas.zip and Gerhard Rünstler.


In this article, we merge two strands from the recent econometric literature. First, factor models based on large sets of macroeconomic variables for forecasting, which have generally proven useful for forecasting. However, there is some disagreement in the literature as to the appropriate method. Second, forecast methods based on mixed-frequency data sampling (MIDAS). This regression technique can take into account unbalanced datasets that emerge from publication lags of high- and low-frequency indicators, a problem practitioner have to cope with in real time. In this article, we introduce Factor MIDAS, an approach for nowcasting and forecasting low-frequency variables like gross domestic product (GDP) exploiting information in a large set of higher-frequency indicators. We consider three alternative MIDAS approaches (basic, smoothed and unrestricted) that provide harmonized projection methods that allow for a comparison of the alternative factor estimation methods with respect to nowcasting and forecasting. Common to all the factor estimation methods employed here is that they can handle unbalanced datasets, as typically faced in real-time forecast applications owing to publication lags. In particular, we focus on variants of static and dynamic principal components as well as Kalman filter estimates in state-space factor models. As an empirical illustration of the technique, we use a large monthly dataset of the German economy to nowcast and forecast quarterly GDP growth. We find that the factor estimation methods do not differ substantially, whereas the most parsimonious MIDAS projection performs best overall. Finally, quarterly models are in general outperformed by the Factor MIDAS models, which confirms the usefulness of the mixed-frequency techniques that can exploit timely information from business cycle indicators.