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Determining the number of factors in approximate factor models with global and group-specific factors

Listed author(s):
  • Francisco Craveiro Dias
  • Maximiano Pinheiro
  • António Rua

For an approximate factor model, in a static representation, with a common component comprising global factors and factors specific to groups of variables, the consistency of the principal components estimator is discussed. An extension of the well known Bai and Ng criteria is proposed for determining the number of global and group-specific factors. The consistency of the suggested criteria is established and the small sample properties are assessed through Monte Carlo simulations. As an empirical illustration, the proposed criteria is applied to estimate the number of global and country-specific macroeconomic factors for the major euro area countries.

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File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp200809.pdf
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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200809.

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Date of creation: 2008
Handle: RePEc:ptu:wpaper:w200809
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