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A Generalized Dynamic Factor Model for Panel Data: Estimation with a Two-Cycle Conditional Expectation-Maximization Algorithm

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  • Nikolaos Zirogiannis

    ()
    (Department of Resource Economics, University of Massachusetts Amherst)

  • Yorghos Tripodis

    ()
    (Department of Biostatistics, Boston University School of Public Health)

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    Abstract

    We develop a generalized dynamic factor model for panel data with the goal of estimating an unobserved index. While similar models have been developed in the literature of dynamic factor analysis, our contribution is threefold. First, contrary to simple dynamic factor analysis where multiple attributes of the same subject are measured at each time period, our model also accounts for multiple subjects. It is therefore suitable to a panel data framework. Second, our model estimates a unique unobserved index for every subject for every time period, as opposed to previous work where a temporal index common to all subjects was used. Third, we develop a novel iterative estimation process which we call the Two-Cycle Conditional Expectation-Maximization (2CCEM) algorithm and is flexible enough to handle a variety of different types of datasets. The model is applied on a panel measuring attributes related to the operation of water and sanitation utilities.

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    File URL: http://courses.umass.edu/resec/workingpapers/documents/ResEcWorkingPaper2013-1.pdf
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    Bibliographic Info

    Paper provided by University of Massachusetts Amherst, Department of Resource Economics in its series Working Papers with number 2013-1.

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    Length: 43 pages
    Date of creation: Jan 2013
    Date of revision:
    Handle: RePEc:dre:wpaper:2013-1

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    Web page: http://www.umass.edu/resec/
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    Related research

    Keywords: Dynamic Factor Models; EM algorithm; Panel Data; State-Space models; IBNET;

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    1. Grosskopf, S. & Valdmanis, V., 1987. "Measuring hospital performance : A non-parametric approach," Journal of Health Economics, Elsevier, vol. 6(2), pages 89-107, June.
    2. Catherine Doz & Domenico Giannone & Lucrezia Reichlin, 2008. "A Quasi Maximum Likelihood Approach for Large Approximate Dynamic Factor Models," Working Papers ECARES 2008_034, ULB -- Universite Libre de Bruxelles.
    3. Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
    4. Sudhir Anand and Amartya Sen, 1994. "Human development Index: Methodology and Measurement," Human Development Occasional Papers (1992-2007) HDOCPA-1994-02, Human Development Report Office (HDRO), United Nations Development Programme (UNDP).
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    6. Caroline van den Berg & Alexander Danilenko, 2011. "The IBNET Water Supply and Sanitation Performance Blue Book," World Bank Publications, The World Bank, number 2545, October.
    7. Donald Rubin & Dorothy Thayer, 1982. "EM algorithms for ML factor analysis," Psychometrika, Springer, vol. 47(1), pages 69-76, March.
    8. James H. Stock & Mark W. Watson, 1989. "New Indexes of Coincident and Leading Economic Indicators," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 351-409 National Bureau of Economic Research, Inc.
    9. Boivin, Jean & Ng, Serena, 2006. "Are more data always better for factor analysis?," Journal of Econometrics, Elsevier, vol. 132(1), pages 169-194, May.
    10. Forni, Mario, et al, 2001. "Coincident and Leading Indicators for the Euro Area," Economic Journal, Royal Economic Society, vol. 111(471), pages C62-85, May.
    11. Jungbacker, B. & Koopman, S.J. & van der Wel, M., 2011. "Maximum likelihood estimation for dynamic factor models with missing data," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1358-1368, August.
    12. Ben S. Bernanke & Jean Boivin, 2001. "Monetary Policy in a Data-Rich Environment," NBER Working Papers 8379, National Bureau of Economic Research, Inc.
    13. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-62, April.
    14. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
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