Determining the Number of Factors and Lag Order in Dynamic Factor Models: A Minimum Entropy Approach
AbstractThis article proposes a solution to one of the issues in the rapidly growing literature on dynamic factor models, i.e., how to determine the optimal number of factors. Our formal test, based upon the canonical correlation procedure related to concepts from information theory, produces estimates of the number of factors and the lag order simultaneously. Simulation experiments illustrate the potential of our approach.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Econometric Reviews.
Volume (Year): 27 (2008)
Issue (Month): 4-6 ()
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- Jan P.A.M. Jacobs & Pieter W. Otter & Ard H.J. den Reijer, 2011.
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2011-15, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Jan Jacobs & Pieter Otter & Ard den Reijer, 2007. "Information, data dimension and factor structure," DNB Working Papers, Netherlands Central Bank, Research Department 150, Netherlands Central Bank, Research Department.
- Reijer, Ard H.J. de & Jacobs, Jan P.A.M. & Otter, Pieter W., 2014. "A criterion for the number of factors in a data-rich environment," Research Report 14008-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
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- Tjeerd M. Boonman & Jan P. A. M. Jacobs & Gerard H. Kuper, 2011. "Why didn't the Global Financial Crisis hit Latin America?," CIRANO Working Papers 2011s-63, CIRANO.
- Heaton, Chris & Solo, Victor, 2012. "Estimation of high-dimensional linear factor models with grouped variables," Journal of Multivariate Analysis, Elsevier, vol. 105(1), pages 348-367.
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