250 - Variable Selection, Estimation and Inference for Multi-period Forecasting Problems

DNB Working Papers
Date 24 June 2010

This paper conducts a broad-based comparison of iterated and direct multi-period forecasting approaches applied to both univariate and multivariate models in the form of parsimonious factor-augmented vector autoregressions. To account for serial correlation in the residuals of the multi-period direct forecasting models we propose a new SUREbased estimation method and modified Akaike information criteria for model selection. Empirical analysis of the 170 variables studied by Marcellino, Stock and Watson (2006) shows that information in factors helps improve forecasting performance for most types of economic variables although it can also lead to larger biases. It also shows that finitesample modifications to the Akaike information criterion can modestly improve the performance of the direct multi-period forecasts.

JEL Classifications: C22, C32, C52, C53.

Key Words: Multi-period forecasts, direct and iterated methods, factor augmented VARs.