Unrestricted MIDAS

The Unrestricted Mixed Data Sampling (Unrestricted MIDAS) model is one of the mixed frequency models available in Indicio.

When forecasting a slower moving time series such as a monthly, quarterly or yearly one, there can be a great benefit to use high frequency indicators to provide more up to date information about how what is happening in the economy.

The Unrestricted MIDAS model when used in a setting of a quarterly main variable with a single monthly indicator will take on the form

where the indicator variable has the subscript t,mi​ where mi​ is referring to the i'th latest monthly observation available. For example, if we were to forecast Q2 and we have monthly data of the indicator available up until May, we would add the observations of March, April and May into the equation.

The Unrestricted MIDAS model will apply linear regression to fit the model, and as such runs the risk of over-fitting to the data. In cases where there are many observations this may still provide good results, the same way as a VAR with no penalty some of the time ends up working quite well. To remedy this, the MIDAS, MIDAS Lasso and MIDAS Sparse Group Lasso models are also available as they employ different techniques which aim at reducing the risk of over-fitting.

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