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Determining the Number of Factors and Lag Order in Dynamic Factor Models: A Minimum Entropy Approach

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  • Jan Jacobs
  • Pieter Otter

Abstract

This article proposes a solution to one of the issues in the rapidly growing literature on dynamic factor models, i.e., how to determine the optimal number of factors. Our formal test, based upon the canonical correlation procedure related to concepts from information theory, produces estimates of the number of factors and the lag order simultaneously. Simulation experiments illustrate the potential of our approach.

Suggested Citation

  • Jan Jacobs & Pieter Otter, 2008. "Determining the Number of Factors and Lag Order in Dynamic Factor Models: A Minimum Entropy Approach," Econometric Reviews, Taylor & Francis Journals, vol. 27(4-6), pages 385-397.
  • Handle: RePEc:taf:emetrv:v:27:y:2008:i:4-6:p:385-397 DOI: 10.1080/07474930801960196
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    References listed on IDEAS

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    7. Chambers, MJ, 1995. "Long Memory and Aggregation in Macroeconomic Time Series," Economics Discussion Papers 2766, University of Essex, Department of Economics.
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    9. D Marinucci & Peter M Robinson, 2001. "Semiparametric Fractional Cointegration Analysis," STICERD - Econometrics Paper Series 420, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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    Cited by:

    1. repec:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-016-1158-5 is not listed on IDEAS
    2. Helmut Lütkepohl, 2014. "Structural Vector Autoregressive Analysis in a Data Rich Environment: A Survey," SFB 649 Discussion Papers SFB649DP2014-004, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Patrick Gagliardini & Elisa Ossola & O. Scaillet, 2016. "A Diagnostic Criterion for Approximate Factor Structure," Swiss Finance Institute Research Paper Series 16-51, Swiss Finance Institute, revised Dec 2016.
    4. repec:dgr:rugsom:14008-eef is not listed on IDEAS
    5. John Lewis & Karsten Staehr, 2007. "The Maastricht inflation criterion : what is the effect of expansion of the European Union ?," Bank of Estonia Working Papers 2007-11, Bank of Estonia, revised 14 Sep 2007.
    6. Jacobs, Jan P.A.M. & Otter, Pieter W. & den Reijer, Ard H.J., 2012. "Information, data dimension and factor structure," Journal of Multivariate Analysis, Elsevier, vol. 106(C), pages 80-91.
    7. Francisco Corona & Pilar Poncela & Esther Ruiz, 2017. "Determining the number of factors after stationary univariate transformations," Empirical Economics, Springer, pages 351-372.
    8. Tjeerd M. Boonman & Jan P. A. M. Jacobs & Gerard H. Kuper, 2011. "Why didn't the Global Financial Crisis hit Latin America?," CIRANO Working Papers 2011s-63, CIRANO.
    9. repec:spr:empeco:v:53:y:2017:i:3:d:10.1007_s00181-016-1167-4 is not listed on IDEAS
    10. Heaton, Chris & Solo, Victor, 2012. "Estimation of high-dimensional linear factor models with grouped variables," Journal of Multivariate Analysis, Elsevier, vol. 105(1), pages 348-367.

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