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Forecasting with Mixed Frequency Samples: The Case of Common Trends

Author

Listed:
  • Peter Fuleky

    (UHERO and Department of Economics, University of Hawaii at Manoa)

  • Carl S. Bonham

    (Department of Economics, University of Hawaii at Manoa)

Abstract
We analyze the forecasting performance of small mixed frequency factor models when the observed variables share stochastic trends. The indicators are observed at various frequencies and are tied together by cointegration so that valuable high frequency information is passed to low frequency series through the common factors. Differencing the data breaks the cointegrating link among the series and some of the signal leaks out to the idiosyncratic components, which do not contribute to the transfer of information among indicators. We find that allowing for common trends improves forecasting performance over a stationary factor model based on differenced data. The "common-trends factor model" outperforms the stationary factor model at all analyzed forecast horizons. Our results demonstrate that when mixed frequency vari- ables are cointegrated, modeling common stochastic trends improves forecasts.

Suggested Citation

  • Peter Fuleky & Carl S. Bonham, 2013. "Forecasting with Mixed Frequency Samples: The Case of Common Trends," Working Papers 201316, University of Hawaii at Manoa, Department of Economics.
    • Handle: RePEc:hai:wpaper:201316
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    File URL: http://www.economics.hawaii.edu/research/workingpapers/WP_13-16R.pdf
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    References listed on IDEAS

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    1. Shang, Yuhuang & Zheng, Tingguo, 2018. "Fitting and forecasting yield curves with a mixed-frequency affine model: Evidence from China," Economic Modelling, Elsevier, vol. 68(C), pages 145-154.

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    More about this item

    Keywords

    Dynamic Factor Model; Mixed Frequency Samples; Common Trends; Forecasting;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • L83 - Industrial Organization - - Industry Studies: Services - - - Sports; Gambling; Restaurants; Recreation; Tourism

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