Do We Exploit all Information for Counterfactual Analysis? Benefits of Factor Models and Idiosyncratic Correction

In this paper we survey the most recent advances in supervised machine learning and highdimensional models for time series forecasting. We consider both linear and nonlinear alternatives. Among the linear methods we pay special attention to penalized regressions and ensemble of models. The nonlinear methods considered in the paper include shallow and deep neural networks, in their feed-forward and recurrent versions, and tree-based  methods, such as random forests and boosted trees. We also consider ensemble and hybrid models by combining ingredients from different alternatives. Tests for superior predictive ability are briefly  reviewed. Finally, we discuss application of machine learning in economics and finance and provide an illustration with high-frequency financial data