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Macroeconomic Forecasting: Statistically Adequate, Temporal Principal Components

The main goal of this dissertation is to expand upon the use of Principal Component Analysis (PCA) in macroeconomic forecasting, particularly in cases where traditional principal components fail to account for all of the systematic information making up common macroeconomic and financial indicators. At the outset, PCA is viewed as a statistical model derived from the reparameterization of the Multivariate Normal model in Spanos (1986). To motivate a PCA forecasting framework prioritizing sound model assumptions, it is demonstrated, through simulation experiments, that model mis-specification erodes reliability of inferences. The Vector Autoregressive (VAR) model at the center of these simulations allows for the Markov (temporal) dependence inherent in macroeconomic data and serves as the basis for extending conventional PCA. Stemming from the relationship between PCA and the VAR model, an operational out-of-sample forecasting methodology is prescribed incorporating statistically adequate, temporal principal components, i.e. principal components which capture not only Markov dependence, but all of the other, relevant information in the original series. The macroeconomic forecasts produced from applying this framework to several, common macroeconomic indicators are shown to outperform standard benchmarks in terms of predictive accuracy over longer forecasting horizons. / Doctor of Philosophy / The landscape of macroeconomic forecasting and nowcasting has shifted drastically in the advent of big data. Armed with significant growth in computational power and data collection resources, economists have augmented their arsenal of statistical tools to include those which can produce reliable results in big data environments. At the forefront of such tools is Principal Component Analysis (PCA), a method which reduces the number of predictors into a few factors containing the majority of the variation making up the original data series. This dissertation expands upon the use of PCA in the forecasting of key, macroeconomic indicators, particularly in instances where traditional principal components fail to account for all of the systematic information comprising the data. Ultimately, a forecasting methodology which incorporates temporal principal components, ones capable of capturing both time dependence as well as the other, relevant information in the original series, is established. In the final analysis, the methodology is applied to several, common macroeconomic and financial indicators. The forecasts produced using this framework are shown to outperform standard benchmarks in terms of predictive accuracy over longer forecasting horizons.

Identiferoai:union.ndltd.org:VTETD/oai:vtechworks.lib.vt.edu:10919/115345
Date05 June 2023
CreatorsDorazio, Brian Arthur
ContributorsNot found, Spanos, Aris, Bose, Niloy, Ashley, Richard A., Habibnia, Ali
PublisherVirginia Tech
Source SetsVirginia Tech Theses and Dissertation
LanguageEnglish
Detected LanguageEnglish
TypeDissertation
FormatETD, application/pdf
RightsIn Copyright, http://rightsstatements.org/vocab/InC/1.0/

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