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Can we use seasonally adjusted indicators in dynamic factor models?

Author

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  • Pérez-Quirós, Gabriel
  • Camacho, Máximo
  • Lovcha, Yuliya

Abstract

We examine the short-term performance of two alternative approaches of forecasting from dynamic factor models. The first approach extracts the seasonal component of the individual indicators before estimating the dynamic factor model, while the alternative uses the non seasonally adjusted data in a model that endogenously accounts for seasonal adjustment. Our Monte Carlo analysis reveals that the performance of the former is always comparable to or even better than that of the latter in all the simulated scenarios. Our results have important implications for the factor models literature because they show the that the common practice of using seasonally adjusted data in this type of models is very accurate in terms of forecasting ability. Using five coincident indicators, we illustrate this result for US data.

Suggested Citation

  • Pérez-Quirós, Gabriel & Camacho, Máximo & Lovcha, Yuliya, 2012. "Can we use seasonally adjusted indicators in dynamic factor models?," CEPR Discussion Papers 9191, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9191
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    1. Maximo Camacho & Gabriel Perez-Quiros, 2010. "Introducing the euro-sting: Short-term indicator of euro area growth," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 663-694.
    2. Camacho, Maximo & Perez-Quiros, Gabriel & Poncela, Pilar, 2018. "Markov-switching dynamic factor models in real time," International Journal of Forecasting, Elsevier, vol. 34(4), pages 598-611.
    3. S. Boragan Aruoba & Francis X. Diebold, 2010. "Real-Time Macroeconomic Monitoring: Real Activity, Inflation, and Interactions," American Economic Review, American Economic Association, vol. 100(2), pages 20-24, May.
    4. Hannan, E J & Terrell, R D & Tuckwell, N E, 1970. "The Seasonal Adjustment of Economic Time Series," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(1), pages 24-52, February.
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    More about this item

    Keywords

    Factor models; Seasonal adjustment; Short-term forecasting;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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