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Model selection in factor-augmented regressions with estimated factors

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  • Antoine A. Djogbenou

Abstract

This paper proposes two consistent model selection procedures for factor-augmented regressions (FAR) in finite samples. We first demonstrate that the usual cross-validation is inconsistent, but that a generalization, leave-d-out cross-validation, is consistent. The second proposed criterion is a generalization of the bootstrap approximation of the squared error of prediction to FARs. The paper provides the validity results and documents their finite sample performance through simulations. An illustrative empirical application that analyzes the relationship between the equity premium and factors extracted from a large panel of U.S. macroeconomic data is conducted.

Suggested Citation

  • Antoine A. Djogbenou, 2021. "Model selection in factor-augmented regressions with estimated factors," Econometric Reviews, Taylor & Francis Journals, vol. 40(5), pages 470-503, April.
    • Handle: RePEc:taf:emetrv:v:40:y:2021:i:5:p:470-503
    DOI: 10.1080/07474938.2020.1808371
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    1. Marine Carrasco & Barbara Rossi, 2016. "In-Sample Inference and Forecasting in Misspecified Factor Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 34(3), pages 313-338, July.
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    Cited by:

    1. Marine Carrasco & Barbara Rossi, 2016. "In-Sample Inference and Forecasting in Misspecified Factor Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 34(3), pages 313-338, July.
    2. Jack Fosten, 2017. "Model selection with estimated factors and idiosyncratic components," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(6), pages 1087-1106, September.
    3. Chen, Qitong & Hong, Yongmiao & Li, Haiqi, 2024. "Time-varying forecast combination for factor-augmented regressions with smooth structural changes," Journal of Econometrics, Elsevier, vol. 240(1).
    4. Antoine A. Djogbenou, 2020. "Comovements in the real activity of developed and emerging economies: A test of global versus specific international factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(3), pages 344-370, April.
    5. Djogbenou, Antoine & Sufana, Razvan, 2024. "Tests for group-specific heterogeneity in high-dimensional factor models," Journal of Multivariate Analysis, Elsevier, vol. 199(C).

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    More about this item

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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