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Analyzing business and financial cycles using multi-level factor models

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  • Jörg Breitung
  • Sandra Eickmeier

Abstract

This paper compares alternative estimation procedures for multi-level factor models which imply blocks of zero restrictions on the associated matrix of factor loadings. We suggest a sequential least squares algorithm for minimizing the total sum of squared residuals and a two-step approach based on canonical correlations that are much simpler and faster than Bayesian approaches previously employed in the literature. Monte Carlo simulations suggest that the estimators perform well in typical sample sizes encountered in the factor analysis of macroeconomic data sets. We apply the methodologies to study international co-movements of business and financial cycles as well as asymmetries over the business cycle in the US.

Suggested Citation

  • Jörg Breitung & Sandra Eickmeier, 2014. "Analyzing business and financial cycles using multi-level factor models," CAMA Working Papers 2014-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2014-43
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-05/43_2014_breitung_eickmeier.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Till Strohsal & Christian R. Proaño & Jürgen Wolters, 2015. "How Do Financial Cycles Interact? Evidence from the US and the UK," SFB 649 Discussion Papers SFB649DP2015-024, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Till Strohsal & Christian R. Proaño & Jürgen Wolters, 2015. "Characterizing the Financial Cycle: Evidence from a Frequency Domain Analysis," SFB 649 Discussion Papers SFB649DP2015-021, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Till Strohsal & Christian R. Proaño & Jürgen Wolters, 2017. "Assessing the Cross-Country Interaction of Financial Cycles: Evidence from a Multivariate Spectral Analysis of the US and the UK," IMK Working Paper 182-2017, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    4. Breitung, Jörg & Eickmeier, Sandra, 2015. "Analyzing business cycle asymmetries in a multi-level factor model," Economics Letters, Elsevier, vol. 127(C), pages 31-34.
    5. Hakan Kara & Pinar Ozlu & Deren Unalmis, 2015. "Turkiye icin Finansal Kosullar Endeksi," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 15(3), pages 41-73.
    6. Schüler, Yves S. & Hiebert, Paul H. & Peltonen, Tuomas A., 2017. "Coherent financial cycles for G-7 countries: Why extending credit can be an asset," ESRB Working Paper Series 43, European Systemic Risk Board.
    7. repec:taf:quantf:v:17:y:2017:i:12:p:1965-1994 is not listed on IDEAS

    More about this item

    Keywords

    Factor models; canonical correlations; international business cycles; financial cycles; business cycle asymmetries;

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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