Determining the Number of Factors in Approximate Factor Models
AbstractIn this paper we develop some econometric theory for factor models of large dimensions. The focus is the determination of the number of factors ("r"), which is an unresolved issue in the rapidly growing literature on multifactor models. We first establish the convergence rate for the factor estimates that will allow for consistent estimation of "r". We then propose some panel criteria and show that the number of factors can be consistently estimated using the criteria. The theory is developed under the framework of large cross-sections ("N") and large time dimensions ("T"). No restriction is imposed on the relation between "N" and "T". Simulations show that the proposed criteria have good finite sample properties in many configurations of the panel data encountered in practice. Copyright The Econometric Society 2001.
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Bibliographic InfoArticle provided by Econometric Society in its journal Econometrica.
Volume (Year): 70 (2002)
Issue (Month): 1 (January)
Other versions of this item:
- Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
- Tom Doan, . "BAING: RATS procedure to estimate factors in a factor model using Bai-Ng formulas," Statistical Software Components RTS00012, Boston College Department of Economics.
- Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
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