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Statistics and Probability LettersVolume 80, Issue 23-24, December 2010, Pages 1806-1813

Improved penalization for determining the number of factors in approximate factor models(Article)(Open Access)

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  • aEuropean Central Bank, Frankfurt am Main, Germany
  • bDepartment of Statistics, London School of Economics and Political Science, United Kingdom
  • cUrban and Regional Research Centre Utrecht (URU), Faculty of Geosciences, Utrecht University, Netherlands
  • dTjalling C. Koopmans Institute (TKI), Utrecht School of Economics, Utrecht University, Netherlands

Abstract

The procedure proposed by Bai and Ng (2002) for identifying the number of factors in static factor models is revisited. In order to improve its performance, we introduce a tuning multiplicative constant in the penalty, an idea that was proposed by Hallin and Liška (2007) in the context of dynamic factor models. Simulations show that our method in general delivers more reliable estimates, in particular in the case of large idiosyncratic disturbances. © 2010 Elsevier B.V.

Author keywords

Approximate factor modelsInformation criterionModel selectionNumber of factors
  • ISSN: 01677152
  • CODEN: SPLTD
  • Source Type: Journal
  • Original language: English
  • DOI: 10.1016/j.spl.2010.08.005
  • Document Type: Article

  Barigozzi, M.; Department of Statistics, London School of Economics and Political Science, United Kingdom;
© Copyright 2010 Elsevier B.V., All rights reserved.

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