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Determining the Number of Factors in Approximate Factor Models

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  • Jushan Bai

    () (Boston College)

  • Serena Ng

    () (Boston College)

Abstract

In this paper we develop some econometric theory for factor models of large dimensions. The focus is the determination of the number of factors, which is an unresolved issue in the rapidly growing literature on multifactor models. We propose some panel C(p) 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 yield almost precise estimates of the number of factors for configurations of the panel data encountered in practice.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 440.

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Length: 32 pages
Date of creation: 03 Apr 2000
Date of revision:
Publication status: forthcoming, Econometrica
Handle: RePEc:boc:bocoec:440

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Keywords: Factor analysis; asset pricing; principal components; model selection;

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References

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