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High-Dimensional Functional Factor Models

Author

Listed:
  • Marc Hallin
  • Gilles Nisol
  • Shahin Tavakoli

Abstract

In this paper, we set up the theoretical foundations for a high-dimensional functional factor model approach in the analysis of large panels of functional time series (FTS). We first establish a representation result stating that if the first r eigenvalues of the covariance operator of a cross-section of N FTS are unbounded as N diverges and if the (r + 1) th one is bounded, then we can represent each FTS as a sum of a common component driven by r factors, common to (almost) all the series, and a weakly cross-correlated idiosyncratic component (all the eigenvalues of the idiosyncratic covariance operator are bounded as N !1). Our model and theory are developed in a general Hilbert space setting that allows for panels mixing functional and scalar time series. We then turn to the estimation of the factors, their loadings, and the common components. We derive consistency results in the asymptotic regime where the number N of series and the number T of time observations diverge, thus exemplifying the “blessing of dimensionality” that explains the success of factor models in the context of high-dimensional (scalar) time series. Our results encompass the scalar case, for which they reproduce and extend, under weaker conditions, well-established results (Bai & Ng 2002).We provide numerical illustrations that corroborate the convergence rates predicted by the theory, and provide finer understanding of the interplay between N and T for estimation purposes. We conclude with an empirical illustration on a dataset of intraday S&P100 and Eurostoxx 50 stock returns, along with their scalar overnight returns.

Suggested Citation

  • Marc Hallin & Gilles Nisol & Shahin Tavakoli, 2019. "High-Dimensional Functional Factor Models," Working Papers ECARES 2019-16, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/288340
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    Keywords

    Functional time series; High-dimensional time series; Factor model; Panel data; Functional data analysis..;

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