Advanced search
Publication Cover
Journal of the American Statistical Association Volume 97, 2002 - Issue 460
Submit an article Journal homepage
4,038
Views
1,737
CrossRef citations to date
0
Altmetric
Primary Article

Forecasting Using Principal Components From a Large Number of Predictors

James H Stock James H. Stock is Professor, Kennedy School of Government, Harvard University, Cambridge, MA 02138, and the National Bureau of Economic Research . Mark W. Watson is Professor, Department of Economics and Woodrow Wilson School, Princeton University, Princeton, NJ 08540, and the National Bureau of Economic Research . The results in this article originally appeared in the paper titled “Diffusion Indexes” (NBER Working Paper 6702, August 1998). The authors thank the associate editor and referees, Jushan Bai, Michael Boldin, Frank Diebold, Gregory Chow, Andrew Harvey, Lucrezia Reichlin, Ken Wallis, and Charles Whiteman for helpful discussions and/or comments, and Lewis Chan, Piotr Eliasz, and Alexei Onatski for skilled research assistance. This research was supported in part by National Science Foundation grants SBR-9409629 and SBR-9730489.
&
Mark W Watson James H. Stock is Professor, Kennedy School of Government, Harvard University, Cambridge, MA 02138, and the National Bureau of Economic Research . Mark W. Watson is Professor, Department of Economics and Woodrow Wilson School, Princeton University, Princeton, NJ 08540, and the National Bureau of Economic Research . The results in this article originally appeared in the paper titled “Diffusion Indexes” (NBER Working Paper 6702, August 1998). The authors thank the associate editor and referees, Jushan Bai, Michael Boldin, Frank Diebold, Gregory Chow, Andrew Harvey, Lucrezia Reichlin, Ken Wallis, and Charles Whiteman for helpful discussions and/or comments, and Lewis Chan, Piotr Eliasz, and Alexei Onatski for skilled research assistance. This research was supported in part by National Science Foundation grants SBR-9409629 and SBR-9730489.
Pages 1167-1179 | Published online: 01 Jan 2012
 
Sample our Mathematics & Statistics journals, sign in here to start your FREE access for 14 days

Abstract

This article considers forecasting a single time series when there are many predictors (N) and time series observations (T). When the data follow an approximate factor model, the predictors can be summarized by a small number of indexes, which we estimate using principal components. Feasible forecasts are shown to be asymptotically efficient in the sense that the difference between the feasible forecasts and the infeasible forecasts constructed using the actual values of the factors converges in probability to 0 as both N and T grow large. The estimated factors are shown to be consistent, even in the presence of time variation in the factor model.

Reprints and Corporate Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

To request a reprint or corporate permissions for this article, please click on the relevant link below:

Order Reprints Request Corporate Permissions

Academic Permissions

Please note: Selecting permissions does not provide access to the full text of the article, please see our help page How do I view content?

Obtain permissions instantly via Rightslink by clicking on the button below:

Request Academic Permissions

If you are unable to obtain permissions via Rightslink, please complete and submit this Permissions form. For more information, please visit our Permissions help page.

Related Research Data

In-Sample Inference and Forecasting in Misspecified Factor Models
Source: Informa UK Limited
Factor and Idiosyncratic Empirical Processes
Source: Informa UK Limited
Is the ex‐ante equity risk premium always positive? Evidence from a new conditional expectations model
Source: Wiley
Fighting terrorism in Africa: evidence from bundling and unbundling institutions
Source: Springer Science and Business Media LLC
Importance of the Macroeconomic Variables in Forecasting Variance
Source: Wiley
Data science, big data and statistics
Source: Springer Science and Business Media LLC
Large Bayesian vector auto regressions
Source: Wiley
Simultaneous variable and factor selection via sparse group lasso in factor analysis
Source: Informa UK Limited
Clustering huge number of financial time series: A panel data approach with high-dimensional predictors and factor structures
Source: Informa UK Limited
Housing Price Forecastability
Source: Wiley
Calibrating Dynamic Factor Models with Genetic Algorithms
Source: Springer International Publishing
Foreign Aid, Education and Lifelong Learning in Africa
Source: Springer Science and Business Media LLC
A TWO-STAGE APPROACH TO SPATIO-TEMPORAL ANALYSIS
Source: Wiley
Semiparametric ultra-high dimensional model averaging of nonlinear dynamic time series
Source: Apollo - University of Cambridge Repository
Understanding Changes in International Business Cycle Dynamics
Source: Oxford University Press (OUP)
Martingale Difference Divergence Matrix and Its Application to Dimension Reduction for Stationary Multivariate Time Series
Source: Taylor & Francis
Bayesian Inference for the One-Factor Copula Model
Source: Informa UK Limited
FORECASTING THE WORLD ECONOMY
Source: Wiley
ACCOUNTING FOR THE POLITICAL UNCERTAINTY FACTOR
Source: Wiley
Disentangling the source of non-stationarity in a panel of seasonal data
Source: Walter de Gruyter GmbH
External Shocks and Business Cycle Fluctuations in Mongolia: Evidence from a Large Bayesian VAR
Source: Informa UK Limited
Sense and sentiment: a behavioural approach to risk premium modelling
Source: Informa UK Limited
Non-structural and structural models in productivity analysis: study of the British Isles during the 2007–2009 financial crisis
Source: Springer Science and Business Media LLC
Challenges of Big Data Analysis
Source: arXiv
High‐dimensional macroeconomic forecasting and variable selection via penalized regression
Source: Oxford University Press (OUP)
Estimating non-stationary common factors : Implications for risk sharing
Source: Springer Science and Business Media LLC
An overview of the estimation of large covariance and precision matrices
Source: Oxford University Press (OUP)
Foreign Aid, Instability, and Governance in Africa
Source: Wiley
Macroeconomic Forecasting with Factor-Augmented Adjusted Band Regression
Source: MDPI AG
ML FOR FACTOR MODELS WITH MISSING DATA
Source: Wiley
State-Space Models on the Stiefel Manifold with a New Approach to Nonlinear Filtering
Source: Uppsala universitet, Statistiska institutionen
Analyzing International Business and Financial Cycles using Multi-Level Factor Models: A Comparison of Alternative Approaches
Source: Emerald Group Publishing Limited
Are key market players in currency derivatives markets affected by financial conditions?
Source: LLC CPC Business Perspectives
Cointegration and Error Correction Mechanisms for Singular Stochastic Vectors
Source: Multidisciplinary Digital Publishing Institute
Moving off Agrarian Societies: Agricultural Productivity to Facilitate Economic Transformations and Non‐agricultural Employment Growth in Sub‐Saharan Africa
Source: Wiley
Evaluating early warning and coincident indicators of business cycles using smooth trends
Source: John Wiley & Sons Ltd
Disentangling the relationship between remittances and financial development: evidence from Jamaica
Source: Informa UK Limited
MONETARY POLICY AND THE HOUSING MARKET
Source: Wiley
Markov-Switching Three-Pass Regression Filter
Source: Informa UK Limited
Outliers Detection in Multivariate Time Series by Independent Component Analysis
Source: MIT Press - Journals
Linear Hypothesis Testing in Dense High-Dimensional Linear Models
Source: arXiv
Do US City Crime Rates Follow a National Trend? The Influence of Nationwide Conditions on Local Crime Patterns
Source: Springer Science and Business Media LLC
How successful are dynamic factor models at forecasting output and inflation? A meta-analytic approach
Source: Wiley
R2 Bounds for Predictive Models: What Univariate Properties Tell us About Multivariate Predictability
Source: Americal Statistical Association
Does confidence data help forecast business cycles? New evidence from Canada
Source: Informa UK Limited
Forecasting Multiple Time Series with One-Sided Dynamic Principal Components
Source: Informa UK Limited
The relationship between the Nasdaq Composite Index and energy futures markets
Source: LLC CPC Business Perspectives
The mobile phone as an argument for good governance in Sub-Saharan Africa
Source: Emerald Publishing
This Time They Are Different; Heterogeneity and Nonlinearity in the Relationship Between Debt and Growth
Source: International Monetary Fund (IMF)
Copula-Based Factor Models for Multivariate Asset Returns
Source: Basel: MDPI
Modeling longevity risk with generalized dynamic factor models and vine-copulae
Source: Cambridge University Press
What Drives Commodity Prices
Source: Wiley
Market Expectations in the Cross-Section of Present Values
Source: Wiley
Which Indicators Matter? Analyzing the Swiss Business Cycle Using a Large-Scale Mixed-Frequency Dynamic Factor Model
Source: Springer Science and Business Media LLC
Asymptotics for Panel Models with Common Shocks
Source: Taylor & Francis
Estimating a dynamic factor model in EViews using the Kalman filter and smoother
Source: Springer Science and Business Media LLC
SELECTION OF THE NUMBER OF FACTORS IN PRESENCE OF STRUCTURAL INSTABILITY: A MONTE CARLO STUDY*
Source: Consortium Erudit
Modelling gold futures: should the level of speculation inform our choice of variables?
Source: Informa UK Limited
Batch and incremental dynamic factor machine learning for multivariate and multi-step-ahead forecasting
Source: Springer Science and Business Media LLC
Random selection of factors preserves the correlation structure in a linear factor model to a high degree.
Source: Public Library of Science (PLoS)
Variable Selection with Spatially Autoregressive Errors: A Generalized Moments LASSO Estimator
Source: Springer Science and Business Media LLC
PANEL DATA MODELS WITH GROUPED FACTOR STRUCTURE
Source: Wiley
Nowcasting global economic growth: A factor‐augmented mixed‐frequency approach
Source: HAL CCSD
The short–term economic impact of leaving the EU
Source: Cambridge University Press (CUP)
The effects of economic policy uncertainty on China’s economy: evidence from time-varying parameter FAVAR
Source: Informa UK Limited
Predicting Tourist Demand Using Big Data
Source: Springer International Publishing
Nowcasting Finnish real economic activity: a machine learning approach
Source: Springer Science and Business Media LLC
Economic uncertainty, trading activity, and commodity futures volatility
Source: Wiley
Forecasting with many predictors using Bayesian additive regression trees
Source: Wiley
Classical time varying factor‐augmented vector auto‐regressive models—estimation, forecasting and structural analysis
Source: Wiley
Improved Covariance Matrix Estimation for Portfolio Risk Measurement: A Review
Source: MDPI AG
Determinants of price fluctuations in the electricity market: a study with PCA and NARDL models
Source: Taylor & Francis Group
Global dimension of inflation
Source: Wiley
Panel Vector Autoregressive Models: A Survey ☆ ☆The views expressed in this article are those of the authors and do not necessarily reflect those of the ECB or the Eurosystem.
Source: Emerald Group Publishing Limited
MONEY, CREDIT AND BANKING
Source: Wiley
Sparse Bayesian Variable Selection in Probit Model for Forecasting U.S. Recessions Using a Large Set of Predictors
Source: Springer Science and Business Media LLC
Asset Pricing with a General Multifactor Structure
Source: Oxford University Press (OUP)
Forecasting with Big Data: A Review
Source: Springer Science and Business Media LLC
Conditional Determinants of Mobile Phones Penetration and Mobile Banking in Sub-Saharan Africa
Source: African Governance and Development Institute (AGDI) Yaoundé
PCA-BASED EX-ANTE FORECASTING OF SWAP TERM STRUCTURES
Source: World Scientific Pub Co Pte Lt
A panel data analysis in BRICS economies
Source: Emerald
A Nationwide or Localized Housing Crisis? Evidence from Structural Instability in US Housing Price and Volume Cycles
Source: Springer Science and Business Media LLC
Restoring credit market stability conditions in Italy: evidences on Loan and Bad Loan dynamics
Source: Informa UK Limited
Risk premia and seasonality in commodity futures
Source: Wiley
Dynamic principal component analysis with missing values
Source: Informa UK Limited
Estimation and inference of FAVAR models
Source: Taylor & Francis
On the penalized maximum likelihood estimation of high-dimensional approximate factor model
Source: Springer Science and Business Media LLC
Are Disaggregate Data Useful for Factor Analysis in Forecasting French GDP
Source: Elsevier BV
SOCIOECONOMIC STATUS MEASUREMENT WITH DISCRETE PROXY VARIABLES: IS PRINCIPAL COMPONENT ANALYSIS A RELIABLE ANSWER?
Source: Wiley
Trends in the Quantiles of the Life Table Survivorship Function
Source: Springer Verlag
Principal Component Analysis of High-Frequency Data
Source: Taylor & Francis
Asymmetric Uncertainty of Mortality and Longevity in the Spanish Population
Source: Springer International Publishing
« Les progrès dans les prévisions : météorologie et économique »
Source: Consortium Erudit
Forecasting models for the Chinese macroeconomy: the simpler the better?
Source: Springer Science and Business Media LLC
Explaining urban economic growth through cluster complementarity
Source: Wiley
Chapter 4 Forecasting Macroeconomic Variables Using Diffusion Indexes in Short Samples with Structural Change
Source: Elsevier
The comparative African regional economics of globalization in financial allocation efficiency: the pre-crisis era revisited
Source: SpringerOpen
On the Importance of Sectoral and Regional Shocks for Price-Setting
Source: Wiley
Construction of the European Economic Sentiment Indicator
Source: Wiley
Model selection criteria for factor-adjusted regressions
Source: Wiley
Weighted‐Covariance Factor Decomposition of Varma Models Applied to Forecasting Quarterly U.S. Real GDP at Monthly Intervals
Source: Wiley
Quantile Co-Movement in Financial Markets: A Panel Quantile Model With Unobserved Heterogeneity
Source: Informa UK Limited
Fighting Capital Flight in Africa: Evidence from Bundling and Unbundling Governance
Source: Springer US
Common dynamics of nonenergy commodity prices and their relation to uncertainty
Source: Informa UK Limited
Generalized Shrinkage Methods for Forecasting Using Many Predictors
Source: Informa UK Limited
Selection procedure for estimating the number of dynamic factors
Source: Wiley
What drives the Bitcoin price? A factor augmented error correction mechanism investigation
Source: Informa UK Limited
Stock return predictability: A factor-augmented predictive regression system with shrinkage method
Source: Taylor & Francis
Dynamic factor models with jagged edge panel data
Source: Wiley
Generalized dynamic principal components
Source: Taylor & Francis
INSTRUMENTAL VARIABLE ESTIMATION IN A DATA RICH ENVIRONMENT
Source: Cambridge University Press (CUP)
AAPOR Task Force Report
Source: Oxford University Press (OUP)
The role of lifelong learning on political stability and non violence: evidence from Africa
Source: Emerald
Business Dynamics, Knowledge Economy, and the Economic Performance of African Countries
Source: Elsevier BV

Linking provided by 

Related research

People also read lists articles that other readers of this article have read.

Recommended articles lists articles that we recommend and is powered by our AI driven recommendation engine.

Cited by lists all citing articles based on Crossref citations.
Articles with the Crossref icon will open in a new tab.