Regression modelForecasting
Dynamic Factor Model
A Dynamic Factor Model (DFM) extracts a small number of latent common factors from a large panel of economic time series and uses those factors to forecast or nowcast a target variable. Formalized for macroeconomic forecasting by James Stock and Mark Watson in their 2002 Journal of Business & Economic Statistics paper, DFMs handle hundreds of indicators simultaneously while avoiding the curse of dimensionality that plagues traditional multivariate models.
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Sources
- Stock, J. H., & Watson, M. W. (2002). Macroeconomic forecasting using diffusion indexes. Journal of Business & Economic Statistics, 20(2), 147–162. DOI: 10.1198/073500102317351921 ↗