Prediction When Factors are Weak

In economic forecasting, principal component analysis (PCA) has been the most prevalent approach to the recovery of factors, which summarize information in a large set of predictors. Nevertheless, the theoretical justification of this approach often relies on a convenient and critical assumption that factors are pervasive. To incorporate information from weaker factors, we propose a new prediction procedure based on supervised PCA, which iterates over selection, PCA, and projection. The selection step finds a subset of predictors most correlated with the prediction target, whereas the projection step permits multiple weak factors of distinct strength. We justify our procedure in an asymptotic scheme where both the sample size and the cross-sectional dimension increase at potentially different rates. Our empirical analysis highlights the role of weak factors in predicting inflation, industrial production growth, and changes in unemployment.

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Publication Details

Journal
Journal of the American Statistical Association
Published
2026-09-01
DOI
https://doi.org/10.1080/01621459.2026.2721776
Citations
6
Primary Topic
Machine Learning and Data Classification
Type
article
Field-Weighted Citation Impact
12.96
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article

Prediction When Factors are Weak

Stefano Giglio, Dacheng Xiu, Dake Zhang
6 citations
Journal of the American Statistical Association
Machine Learning and Data Classification
12.96
article

Prediction When Factors are Weak

Stefano Giglio, Dacheng Xiu, Dake Zhang
article en
6 citations

Abstract

In economic forecasting, principal component analysis (PCA) has been the most prevalent approach to the recovery of factors, which summarize information in a large set of predictors. Nevertheless, the theoretical justification of this approach often relies on a convenient and critical assumption that factors are pervasive. To incorporate information from weaker factors, we propose a new prediction procedure based on supervised PCA, which iterates over selection, PCA, and projection. The selection step finds a subset of predictors most correlated with the prediction target, whereas the projection step permits multiple weak factors of distinct strength. We justify our procedure in an asymptotic scheme where both the sample size and the cross-sectional dimension increase at potentially different rates. Our empirical analysis highlights the role of weak factors in predicting inflation, industrial production growth, and changes in unemployment.

Journal of the American Statistical Association
National Bureau of Economic Research (US), Shanghai Jiao Tong University (CN), Yale University (US), University of Chicago (US), Centre for Economic Policy Research (GB)
Climate action
Openalex Percentile: Top 3%
Machine Learning and Data Classification
12.96
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Prediction When Factors are Weak — Stefano Giglio, Dacheng Xiu, et al. · Journal of the American Statistical Association (2026) | TGRS Research Map | TGRS