A New Method for Determining the Number of Factors in Factor Models with Large Datasets
AbstractThe paradigm of a factor model is very appealing and has been used extensively in economic analyses. Underlying the factor model is the idea that a large number of economic variables can be adequately modelled by a small number of indicator variables. Throughout this extensive research activity on large dimensional factor models a major preoccupation has been the development of tools for determining the number of factors needed for modelling. This paper provides an alternative method to information criteria as tools for estimating the number of factors in large dimensional factor models. The theoretical properties of the method are explored and an extensive Monte Carlo study is undertaken. Results are favourable for the new method and suggest that it is a reasonable alternative to existing methods.
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Bibliographic InfoPaper provided by Queen Mary, University of London, School of Economics and Finance in its series Working Papers with number 525.
Date of creation: Oct 2004
Date of revision:
Factor models; Large sample covariance matrix; Maximum eigenvalue;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
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