The Generalized Dynamic Factor Model: Representation Theory
AbstractThis paper, along with the companion paper Forni, Hallin, Lippi and Reichlin (1999), introduces a new model-the generalized dynamic factor model-for the empirical analysis of financial and macroeconomic data sets characterized by a large number of observations both cross-section and over time. This model provides a generalization of the static approximate factor model of Chamberlain (1983) and Chamberlain and Rothschild (1983) by allowing serial correlation within and across individual processes, and of the dynamic factor model of Sargent and Sims (1977) and Geweke (1977) by allowing for non-orthogonal idiosyncratic terms. While the companion paper concentrates on identification and estimation, here we give a full characterization of the generalized dynamic factor model in terms of observable spectral density matrices, thus laying a firm basis for empirical implementation of the model. Moreover, the common factors are obtained as limits of linear combinations of dynamic principal components. Thus the paper reconciles two seemingly unrelated statistical constructions.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2509.
Date of creation: Jul 2000
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Other versions of this item:
- Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(06), pages 1113-1141, December.
- 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; Longitudinal Data; Spatial Time Series
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
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