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Determining the Number of Factors in Approximate Factor Models

Author

Listed:
  • Jushan Bai

    (Boston College)

  • Serena Ng

    (Boston College)

Abstract

In this paper we develop some statistical theory for factor models of large dimensions. The focus is the determination of the number of factors, which is an unresolved issue in the rapidly growing literature on multifactor models. We propose a panel C_p criterion and show that the number of factors can be consistently estimated using the criterion. The theory is developed under the framework of large cross-sections (N) and large time dimensions (T). No restriction is imposed on the relation between N and T. Simulations show that the proposed criterion yields almost precise estimates of the number of factors for configurations of the panel data encountered in practice.

Suggested Citation

  • Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Econometric Society World Congress 2000 Contributed Papers 1504, Econometric Society.
    • Handle: RePEc:ecm:wc2000:1504
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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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