Miguel C. Herculano, Santiago Montoya-Blandón
arXiv 9 Dec 2024 · Econometrics
arXiv:2412.06688 · PDF · DOI · OpenAlex · Extracted main text
We develop a probabilistic variant of Partial Least Squares (PLS) we call Probabilistic Targeted Factor Analysis (PTFA), which can be used to extract common factors in predictors that are useful to predict a set of predetermined target variables. Along with the technique, we provide an efficient expectation-maximization (EM) algorithm to learn the parameters and forecast the targets of interest. We develop a number of extensions to missing-at-random data, stochastic volatility, factor dynamics, and mixed-frequency data for real-time forecasting. In a simulation exercise, we show that PTFA outperforms PLS at recovering the common underlying factors affecting both features and target variables delivering better in-sample fit, and providing valid forecasts under contamination such as measurement error or outliers. Finally, we provide three applications in Economics and Finance where PTFA outperforms compared with PLS and Principal Component Analysis (PCA) at out-of-sample forecasting.
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| Reference | Intensity | Mentions | Sections | Main text | |
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| 1 | Goyal, Amit and Welch, Ivo and Zafirov, Athanasse (2024) A Comprehensive 2022 Look at the Empirical Performance of Equity Premium Prediction | 0.874 | 5 | 2 | 100% |
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| 5 | Chan, Joshua and Koop, Gary and Poirier, Dale J. and Tobias, Justin L (2019) Bayesian Econometric Methods | 0.644 | 2 | 2 | 100% |
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| 7 | Doz, Catherine and Giannone, Domenico and Reichlin, Lucrezia (2011) A two-step estimator for large approximate dynamic factor models based on Kalman filtering | 0.644 | 2 | 2 | 100% |
| 8 | Groen, Jan J. J. and Kapetanios, George (2016) Revisiting useful approaches to data-rich macroeconomic forecasting | 0.644 | 2 | 2 | 100% |
| 9 | Kelly, Bryan and Pruitt, Seth (2015) The three-pass regression filter: A new approach to forecasting using many predictors | 0.644 | 2 | 2 | 100% |
| 10 | Welch, Ivo and Goyal, Amit (2007) A Comprehensive Look at The Empirical Performance of Equity Premium Prediction | 0.644 | 2 | 2 | 100% |
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