Macroeconomic Forecast Accuracy in Data-Rich Environment

Journal of Applied Econometrics // https://doi.org/10.1002/jae.2725

50 Pages Posted: 6 Jan 2021

See all articles by Maxime Leroux

Maxime Leroux

University of Quebec at Montreal (UQAM) - Department of Economics

Rachidi Kotchoni

Université Paris Nanterre; African Development Bank

Dalibor Stevanovic

Universite du Quebec a Montreal

Date Written: February 2, 2018

Abstract

The performance of six classes of models in forecasting different types of economic series is evaluated in an extensive pseudo out‐of‐sample exercise. One of these forecasting models, regularized data‐rich model averaging (RDRMA), is new in the literature. The findings can be summarized in four points. First, RDRMA is difficult to beat in general and generates the best forecasts for real variables. This performance is attributed to the combination of regularization and model averaging, and it confirms that a smart handling of large data sets can lead to substantial improvements over univariate approaches. Second, the ARMA(1,1) model emerges as the best to forecast inflation changes in the short run, while RDRMA dominates at longer horizons. Third, the returns on the S&P 500 index are predictable by RDRMA at short horizons. Finally, the forecast accuracy and the optimal structure of the forecasting equations are quite unstable over time.

Keywords: Data-Rich Models, Factor Models, Forecasting, Model Averaging, Sparse Models, Regularization

JEL Classification: C55, C32, E17

Suggested Citation

Leroux, Maxime and Kotchoni, Rachidi and Stevanovic, Dalibor, Macroeconomic Forecast Accuracy in Data-Rich Environment (February 2, 2018). Journal of Applied Econometrics // https://doi.org/10.1002/jae.2725, Available at SSRN: https://ssrn.com/abstract=3722813 or http://dx.doi.org/10.2139/ssrn.3722813

Maxime Leroux

University of Quebec at Montreal (UQAM) - Department of Economics ( email )

3150, rue Jean-Brillant
Montreal, Quebec H3T 1N8
Canada

Rachidi Kotchoni (Contact Author)

Université Paris Nanterre ( email )

200 Avenue de la République
Nanterre, Hauts de Seine 92000
France

African Development Bank ( email )

Rue Joseph Anoma
Abidjan, Ivory Coast 01 BP 1387
Ivory Coast (Cote D'ivoire)

Dalibor Stevanovic

Universite du Quebec a Montreal ( email )

Montréal, QC
Canada

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