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Econometric Analysis of Large Factor Models

Author

Listed:
  • Jushan Bai

    (Department of Economics, Columbia University, New York, NY 10027
    School of Finance, Nankai University, Tianjin, China 300350)

  • Peng Wang

    (Department of Economics, The Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong)

Abstract

Large factor models use a few latent factors to characterize the co-movement of economic variables in a high-dimensional data set. High dimensionality brings challenges as well as new insights into the advancement of econometric theory. Because of their ability to effectively summarize information in large data sets, factor models have been increasingly used in economics and finance. The factors, estimated from the high-dimensional data, can, for example, help improve forecasting, provide efficient instruments, control for nonlinear unobserved heterogeneity, and capture cross-sectional dependence. This article reviews the theory on estimation and statistical inference of large factor models. It also discusses important applications and highlights future directions.

Suggested Citation

  • Jushan Bai & Peng Wang, 2016. "Econometric Analysis of Large Factor Models," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 53-80, October.
    • Handle: RePEc:anr:reveco:v:8:y:2016:p:53-80
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    File URL: http://www.annualreviews.org/doi/10.1146/annurev-economics-080315-015356
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    More about this item

    Keywords

    high-dimensional data; factor-augmented regression; FAVAR; number of factors; interactive effects; principal components; regularization; Bayesian estimation;
    All these keywords.

    JEL classification:

    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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