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Common factors in nonstationary panel data with a deterministic trend - estimation and distribution theory

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  • Katarzyna Maciejowska

Abstract

The paper studies large-dimention factor models with nonstationary factors and allows for deterministic trends and factors integrated of order higher then one.We follow the model speci.cation of Bai (2004) and derive the convergence rates and the limiting distributions of estimated factors, factors loadings and common components. We discuss in detail a model with a linear time trend. We ilustrate the theory with an empirical exmple that studies the fluctuations of the real activity of U.S.economy. We show that these .uctuationas can be explained by two nonstationary factors and a small number of stationary factors. We test the economic interpretation of nonstationary factors.

Suggested Citation

  • Katarzyna Maciejowska, 2010. "Common factors in nonstationary panel data with a deterministic trend - estimation and distribution theory," Economics Working Papers ECO2010/28, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2010/28
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    Keywords

    Common-stochastic trends; Dynamic factors; Generalized dynamic factor models; Principal components; Nonstationary panel data;

    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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