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Dynamic Hierarchical Factor Model

Author

Listed:
  • Emanuel Moench

    (Federal Reserve Bank of New York)

  • Serena Ng

    (Columbia University)

  • Simon Potter

    (Federal Reserve Bank of New York)

Abstract

This paper uses multilevel factor models to characterize within- and between-block variations as well as idiosyncratic noise in large dynamic panels. Block-level shocks are distinguished from genuinely common shocks, and the estimated block-level factors are easy to interpret. The framework achieves dimension reduction and yet explicitly allows for heterogeneity between blocks. The model is estimated using an MCMC algorithm that takes into account the hierarchical structure of the factors. The importance of block-level variations is illustrated in a four-level model estimated on a panel of 445 series related to different categories of real activity in the United States. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Emanuel Moench & Serena Ng & Simon Potter, 2013. "Dynamic Hierarchical Factor Model," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1811-1817, December.
    • Handle: RePEc:tpr:restat:v:95:y:2013:i:5:p:1811-1817
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    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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