School of Economics and Finance

No. 590: A Comparison of Methods for the Construction of Composite Coincident and Leading Indexes for the UK

Andrea Carriero , Queen Mary, University of London
Massimiliano Marcellino , IEP-Bocconi University, IGIER and CEPR

March 1, 2007

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In this paper we provide an overview of recent developments in the methodology for the construction of composite coincident and leading indexes, and apply them to the UK. In particular, we evaluate the relative merits of factor based models and Markov switching specifications for the construction of coincident and leading indexes. For the leading indexes we also evaluate the performance of probit models and pooling. The results indicate that alternative methods produce similar coincident indexes, while there are more marked di.erences in the leading indexes.

J.E.L classification codes: E32, E37, C53

Keywords:Forecasting, Business cycles, Leading indicators, Coincident indicators, Turning points