Can We Use Seasonally Adjusted Indicators in Dynamic Factor Models?

Maximo Camacho, Gabriel Perez-Quiros, Yuliya Yuliya Lovcha
2012 Social Science Research Network  
We examine the short-term performance of two alternative approaches to forecasting using dynamic factor models. The fi rst approach extracts the seasonal component of the individual indicators before estimating the dynamic factor model, while the alternative uses the nonseasonally 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
more » ... simulated scenarios. Our results have important implications for the factor models literature because they show that the common practice of using seasonally adjusted data in this type of model is very accurate in terms of forecasting ability. Drawing on fi ve coincident indicators, we illustrate this result for US data.
doi:10.2139/ssrn.2159652 fatcat:d6tuticexjcajbettvm2uecnsi