DP4533 Interpolation and Backdating with A Large Information Set

Author(s): Elena Angelini, Jérôme Henry, Massimiliano Marcellino
Publication Date: October 2004
Keyword(s): Factor model, Interpolation, Kalman filter, spline
JEL(s): C32, C43, C82
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4533

Existing methods for data interpolation or backdating are either univariate or based on a very limited number of series, due to data and computing constraints that were binding until the recent past. Nowadays large datasets are readily available, and models with hundreds of parameters are fastly estimated. We model these large datasets with a factor model, and develop an interpolation method that exploits the estimated factors as an efficient summary of all the available information. The method is compared with existing standard approaches from a theoretical point of view, by means of Monte Carlo simulations, and also when applied to actual macroeconomic series. The results indicate that our method is more robust to model misspecification, although traditional multivariate methods also work well while univariate approaches are systematically outperformed. When interpolated series are subsequently used in econometric analyses, biases can emerge, depending on the type of interpolation but again be reduced with multivariate approaches, including factor-based ones.