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Shrinkage estimation of multiple threshold factor models

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  • Ma, Chenchen
  • Tu, Yundong

Abstract

This paper proposes a multiple threshold factor model to enhance the flexibility in modeling the underlying regime switching mechanism for high dimensional time series. The factor loadings are assumed to switch between different regimes according to the value of a threshold variable. A novel estimation procedure is proposed to consistently estimate the multiple thresholds with the aid of sorting operation, principal component analysis and shrinkage estimation, which is practically easy-to-implement and computationally efficient. Furthermore, asymptotic properties for the multiple threshold estimators are established, together with other theoretical results. Monte Carlo simulations demonstrate that the procedure works well in finite samples. The U.S. data sets are analyzed with the proposed model to illustrate the threshold effect of economy policy uncertainty on the financial market.

Suggested Citation

  • Ma, Chenchen & Tu, Yundong, 2023. "Shrinkage estimation of multiple threshold factor models," Journal of Econometrics, Elsevier, vol. 235(2), pages 1876-1892.
    • Handle: RePEc:eee:econom:v:235:y:2023:i:2:p:1876-1892
    DOI: 10.1016/j.jeconom.2023.02.002
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    More about this item

    Keywords

    Dimension reduction; Group Lasso; Information criterion; Nonlinear factor model; Principal component analysis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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