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A data-driven approach for forecasting returns of asset prices is introduced. Special emphasis is given to data-driven specification and to dimension reduction. Specification is performed by a modified AIC, BIC-based An-algorithm. Quasi-static principal component analysis, quasi-static factor models with idiosyncratic errors and reduced rank regression are considered. The forecasting results obtained are compared.
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Manfred Deistler (2005) studied this question.
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