New model predicts economic volatility with unprecedented accuracy.
The article explores how different economic factors move together in terms of their volatility. Two models were tested using U.S. economic data. The first model suggests that a common hidden factor influences volatility, along with individual factors. The second model simplifies this by removing individual factors and setting all loadings to the common factor at 1. This simplified model, despite being somewhat inaccurate, performed well in forecasting economic trends compared to traditional models.