Factor-MIDAS for nowcasting and forecasting with ragged-edge data : a model comparison for German GDP
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0305-9049
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Oxford Bulletin of Economics and Statistics, 2010, 72, 4, 518-550
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MARCELLINO, Massimiliano, SCHUMACHER, Christian, Factor-MIDAS for nowcasting and forecasting with ragged-edge data : a model comparison for German GDP, Oxford Bulletin of Economics and Statistics, 2010, 72, 4, 518-550 - https://hdl.handle.net/1814/16548
Abstract
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.