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A Grouped Factor Model

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  • Chen, Pu
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Abstract

In this paper we present a grouped factor model that is designed to explore grouped structures in factor models. We develop an econometric theory consisting of a consistent classification rule to assign variables to their respective groups and a class of consistent model selection criteria to determine the number of groups as well as the number of factors in each group. As a result, we propose a procedure to estimate grouped factor models, in which the unknown number of groups, the unknown relationship between variables to their groups as well as the unknown number of factors in each group are statistically determined based on observed data. The procedure can help to estimate common factor that are pervasive across all groups and group-specific factors that are pervasive only in the respective groups. Simulations show that our proposed estimation procedure has satisfactory finite sample properties.

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File URL: http://mpra.ub.uni-muenchen.de/28083/
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File URL: http://mpra.ub.uni-muenchen.de/34075/
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File URL: http://mpra.ub.uni-muenchen.de/36082/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28083.

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Date of creation: 01 Oct 2010
Date of revision: 11 Jan 2011
Handle: RePEc:pra:mprapa:28083

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Related research

Keywords: Factor Models; Generalized Principal Component Analysis; Model Selection;

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References

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  1. Sydney C. Ludvigson & Serena Ng, 2009. "A Factor Analysis of Bond Risk Premia," NBER Working Papers 15188, National Bureau of Economic Research, Inc.
  2. Jean Boivin & Serena Ng, 2003. "Are More Data Always Better for Factor Analysis?," NBER Working Papers 9829, National Bureau of Economic Research, Inc.
  3. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
  4. Goyal, Amit & PĂ©rignon, Christophe & Villa, Christophe, 2008. "How common are common return factors across the NYSE and Nasdaq?," Journal of Financial Economics, Elsevier, vol. 90(3), pages 252-271, December.
  5. Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, vol. 48(4), pages 1263-91, September.
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Cited by:
  1. Chen, Pu, 2012. "Common Factors and Specific Factors," MPRA Paper 36085, University Library of Munich, Germany.

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