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A two-step estimator for large approximate dynamic factor models based on Kalman filtering

  • Doz, Catherine
  • Giannone, Domenico
  • Reichlin, Lucrezia

This paper shows consistency of a two-step estimation of the factors in a dynamic approximate factor model when the panel of time series is large (n large). In the first step, the parameters of the model are estimated from an OLS on principal components. In the second step, the factors are estimated via the Kalman smoother. The analysis develops the theory for the estimator considered in Giannone et al. (2004) and Giannone et al. (2008) and for the many empirical papers using this framework for nowcasting.

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File URL: http://www.sciencedirect.com/science/article/pii/S030440761100039X
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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 164 (2011)
Issue (Month): 1 (September)
Pages: 188-205

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Handle: RePEc:eee:econom:v:164:y:2011:i:1:p:188-205
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. Boriss Siliverstovs & Konstantin A. Kholodilin, 2010. "Assessing the Real-Time Informational Content of Macroeconomic Data Releases for Now-/Forecasting GDP: Evidence for Switzerland," KOF Working papers 10-251, KOF Swiss Economic Institute, ETH Zurich.
  2. Doz, Catherine & Giannone, Domenico & Reichlin, Lucrezia, 2011. "A two-step estimator for large approximate dynamic factor models based on Kalman filtering," Journal of Econometrics, Elsevier, vol. 164(1), pages 188-205, September.
  3. Banbura, Marta & Rünstler, Gerhard, 2007. "A look into the factor model black box: publication lags and the role of hard and soft data in forecasting GDP," Working Paper Series 0751, European Central Bank.
  4. Elena Angelini & Gonzalo Camba‐Mendez & Domenico Giannone & Lucrezia Reichlin & Gerhard Rünstler, 2011. "Short‐term forecasts of euro area GDP growth," Econometrics Journal, Royal Economic Society, vol. 14, pages C25-C44, 02.
  5. 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.
  6. Domenico Giannone & Lucrezia Reichlin & Luca Sala, 2005. "Monetary Policy in Real Time," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 161-224 National Bureau of Economic Research, Inc.
  7. Giannone, Domenico & Reichlin, Lucrezia & Small, David, 2008. "Nowcasting: The real-time informational content of macroeconomic data," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 665-676, May.
  8. Karim Barhoumi & Szilard Benk & Riccardo Cristadoro & Ard Den Reijer & Audrone Jakaitiene & Piotr Jelonek & António Rua & Gerhard Rünstler & Karsten Ruth & Christophe Van Nieuwenhuyze, 2008. "Short-term forecasting of GDP using large monthly datasets - a pseudo real-time forecast evaluation exercise," Occasional Paper Series 84, European Central Bank.
  9. D'Agostino, Antonello & Giannone, Domenico, 2007. "Comparing Alternative Predictors Based on Large-Panel Factor Models," CEPR Discussion Papers 6564, C.E.P.R. Discussion Papers.
  10. Matheson, Troy D., 2010. "An analysis of the informational content of New Zealand data releases: The importance of business opinion surveys," Economic Modelling, Elsevier, vol. 27(1), pages 304-314, January.
  11. Catherine Doz & Domenico Giannone & Lucrezia Reichlin, 2012. "A Quasi–Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1014-1024, November.
  12. Forni, Mario & Lippi, Marco, 2001. "The Generalized Dynamic Factor Model: Representation Theory," Econometric Theory, Cambridge University Press, vol. 17(06), pages 1113-1141, December.
  13. Jean Boivin & Serena Ng, 2003. "Are More Data Always Better for Factor Analysis?," NBER Working Papers 9829, National Bureau of Economic Research, Inc.
  14. Gary Chamberlain & Michael Rothschild, 1982. "Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets," NBER Working Papers 0996, National Bureau of Economic Research, Inc.
  15. Forni M. & Hallin M., 2003. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Computing in Economics and Finance 2003 143, Society for Computational Economics.
  16. Barhoumi, K. & Darné, O. & Ferrara, L., 2009. "Are disaggregate data useful for factor analysis in forecasting French GDP?," Working papers 232, Banque de France.
  17. 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.
  18. D'Agostino, Antonello & McQuinn, Kieran & O'Brien, Derry, 2011. "Nowcasting Irish GDP," MPRA Paper 32941, University Library of Munich, Germany.
  19. Danny Quah & Thomas J. Sargent, 1992. "A dynamic index model for large cross sections," Discussion Paper / Institute for Empirical Macroeconomics 77, Federal Reserve Bank of Minneapolis.
  20. 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.
  21. Forni, Mario & Reichlin, Lucrezia, 2001. "Federal policies and local economies: Europe and the US," European Economic Review, Elsevier, vol. 45(1), pages 109-134, January.
  22. Forni, Mario & Giannone, Domenico & Lippi, Marco & Reichlin, Lucrezia, 2007. "Opening the black box: structural factor models with large cross-sections," Working Paper Series 0712, European Central Bank.
  23. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
  24. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2004. "The generalized dynamic factor model consistency and rates," Journal of Econometrics, Elsevier, vol. 119(2), pages 231-255, April.
  25. Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
  26. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
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