Diffusion index forecasts under weaker loadings: PCA, ridge regression, and random projections
较弱载荷下的扩散指数预测:主成分、岭回归与随机投影
We study the accuracy of forecasts in the diffusion index forecast model with possibly weak loadings. The default option to construct forecasts is to estimate the factors through principal component analysis (PCA) on the available predictor matrix, and use the estimated factors to forecast the outcome variable. Alternatively, we can directly relate the outcome variable to the predictors through either ridge regression or random projections. We establish that forecasts based…