2018-02-03
Spurious principal components
Publication
Publication
Applied Economics Letters , Volume 26 - Issue 1 p. 37- 39
The principal component regression (PCR) is often used to forecast macroeconomic variables when there are many predictors. In this letter, we argue that it makes sense to pre-whiten the predictors before including these in a PCR. With simulation experiments, we show that without such pre-whitening, spurious principal components can appear and that these can become spuriously significant in a PCR. With an illustration to annual inflation rates for five African countries, we show that non-spurious principal components can be genuinely relevant in empirical forecasting models.
| Additional Metadata | |
|---|---|
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| doi.org/10.1080/13504851.2018.1433292, hdl.handle.net/1765/104559 | |
| Econometric Institute Reprint Series | |
| Applied Economics Letters | |
| Organisation | Department of Econometrics |
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Franses, P. H., & Janssens, E. (2018). Spurious principal components. Applied Economics Letters, 26(1), 37–39. doi:10.1080/13504851.2018.1433292 |
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