Testing the Number of Factors: An Empirical Assessment for a Forecasting Purpose

16 Pages Posted: 23 Dec 2012

See all articles by Karim Barhoumi

Karim Barhoumi

International Monetary Fund (IMF)

Olivier Darné

University of Nantes - Faculty of Business and Economics

Laurent Ferrara

SKEMA Business School; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA); Université Paris Ouest - Nanterre, La Défense - EconomiX

Date Written: February 2013

Abstract

GDP forecasts based on dynamic factor models, applied to a large data set, are now widely used by practitioners involved in nowcasting and short‐term macroeconomic forecasting. One recurrent empirical question that arises when dealing with such models is the way to determine the optimal number of factors. At the same time, statistical tests have recently been put forward in the literature in order to optimally determine the number of significant factors. In this article, we propose to reconcile both fields of interest by selecting the number of factors, through a testing procedure, to include in the forecasting equation. Through an empirical exercise on French and German GDPs, we assess the impact of a battery of recent statistical tests for the number of factors for a forecasting purpose. By implementing a rolling experience, we also assess the stability of the results overtime.

JEL Classification: C13, C52, C53, F47

Suggested Citation

Barhoumi, Karim and Darné, Olivier and Ferrara, Laurent, Testing the Number of Factors: An Empirical Assessment for a Forecasting Purpose (February 2013). Oxford Bulletin of Economics and Statistics, Vol. 75, Issue 1, pp. 64-79, 2013, Available at SSRN: https://ssrn.com/abstract=2193215 or http://dx.doi.org/10.1111/obes.12010

Karim Barhoumi (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Olivier Darné

University of Nantes - Faculty of Business and Economics ( email )

Nantes
France

Laurent Ferrara

SKEMA Business School ( email )

Paris la Défense, 92916
France

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Université Paris Ouest - Nanterre, La Défense - EconomiX ( email )

200 Avenue de la République
92000

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