Extracting Nonlinear Signals from Several Economic Indicators

• DOI: 10.1002/jae.2416
• Publication Date: 2014-09-19T08:55:08Z
• Authors: Maximo Camacho; Gabriel Perez-Quiros; Pilar Poncela
• Keywords: Economic indicator; Dynamic factor; Stock (firearms)

We develop a twofold analysis of how the information provided by several economic indicators can be used in Markov switching dynamic factor models to identify business cycle turning points. First, we compare performance fully nonlinear multivariate specification (one-step approach) with 'shortcut' using linear model obtain coincident indicator, which is then compute probabilities (two-step approach). Second, examine role increasing number indicators. Our results suggest that one step generally preferred two steps, especially vicinity points, although its gains diminish as quality increases. Additionally, also decreasing returns adding more similar signal-to-noise ratios. Using four constituent series Stock–Watson index, illustrate these for US data. Copyright © 2014 John Wiley & Sons, Ltd.