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Implications of Dynamic Factor Models for VAR Analysis

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James H. Stock
Mark W. Watson

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Abstract

This paper considers VAR models incorporating many time series that interact through a few dynamic factors. Several econometric issues are addressed including estimation of the number of dynamic factors and tests for the factor restrictions imposed on the VAR. Structural VAR identification based on timing restrictions, long run restrictions, and restrictions on factor loadings are discussed and practical computational methods suggested. Empirical analysis using U.S. data suggest several (7) dynamic factors, rejection of the exact dynamic factor model but support for an approximate factor model, and sensible results for a SVAR that identifies money policy shocks using timing restrictions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11467.

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Date of creation: Jul 2005
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Handle: RePEc:nbr:nberwo:11467

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fabio C. Bagliano & Claudio Morana, 2006. "A New Approach to Factor Vector Autoregressive Estimation with an Application to Large-Scale Macroeconometric Modelling," Carlo Alberto Notebooks 28, Collegio Carlo Alberto. [Downloadable!]
  2. Perez, Marcos & Ahn, Seung Chan, 2007. "GMM Estimation of the Number of Latent Factors," MPRA Paper 4862, University Library of Munich, Germany. [Downloadable!]
  3. Jean-Philippe Bouchaud & Laurent Laloux & M. Augusta Miceli & Marc Potters, 2005. "Large dimension forecasting models and random singular value spectra," Science & Finance (CFM) working paper archive 500066, Science & Finance, Capital Fund Management. [Downloadable!]
  4. Fabio C. Bagliano & Claudio Morana, 2006. "International Macroeconomic Dynamics: A Factor Vector Autoregressive Approach," Carlo Alberto Notebooks 32, Collegio Carlo Alberto. [Downloadable!]
  5. Christine De Mol & Domenico Giannone & Lucrezia Reichlin, 2006. "Forecasting using a large number of predictors - Is Bayesian regression a valid alternative to principal components?," Working Paper Series 700, European Central Bank. [Downloadable!]
    Other versions:
  6. Ricardo Reis & Mark W. Watson, 2007. "Relative Goods' Prices and Pure Inflation," NBER Working Papers 13615, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Chihwa Kao & Lorenzo Trapani & Giovanni Urga, 2007. "Modelling and Testing for Structural Changes in Panel Cointegration Models with Common and Idiosyncratic Stochastic Trend," Center for Policy Research Working Papers 92, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  8. M. Hashem Pesaran & Ron P. Smith, 2006. "Macroeconometric Modelling with a Global Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  9. Wei-Choun Yu, 2008. "Macroeconomic and financial market volatilities: an empirical evidence of factor model," Economics Bulletin, Economics Bulletin, vol. 3(33), pages 1-18. [Downloadable!]
  10. Chihwa Kao & Lorenzo Trapani & Giovanni Urga, 2006. "The Asymptotics for Panel Models with Common Shocks," Center for Policy Research Working Papers 77, Center for Policy Research, Maxwell School, Syracuse University. [Downloadable!]
  11. Sydeny C. Ludvigson & Serena Ng, 2005. "Macro Factors in Bond Risk Premia," NBER Working Papers 11703, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  18. Fabio Bagliano & Claudio Morana, 2008. "Factor vector autoregressive estimation: a new approach," Journal of Economic Interaction and Coordination, Springer, vol. 3(1), pages 15-23, June. [Downloadable!] (restricted)
  19. Chris Bloor & Troy Matheson, 2008. "Analysing shock transmission in a data-rich environment: A large BVAR for New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/09, Reserve Bank of New Zealand. [Downloadable!]
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