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Efficient Estimation of Nonstationary Factor Models

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  • In Choi

    (Department of Economics, Sogang University, Seoul)

Abstract

This paper studies the generalized principal component estimator (GPCE) of Choi (2007) for the factor model Xt = ⋀Ft + et where Ft is a unit-root process. First, this paper derives asymptotic distributions of the GPCEs of the factor and factor-loading spaces which show that the GPCE enjoys an efficiency gain over the conventional principal component estimator. Second, this paper extends the conventional static factor model to those with time polynomials, and studies the GPCE for the models. The GPCE continues to have an efficiency gain over the conventional principal component estimator for the extended model. Third, this paper considers the forecasting regression that uses the GPCE-based estimates of nonstationary factors and shows that the GPCE yields more accurate forecasts than the conventional principal component estimator. Last, asymptotic equivalence of the GPCE and feasible GPCE (FGPCE) of the factor space is established.

Suggested Citation

  • In Choi, 2011. "Efficient Estimation of Nonstationary Factor Models," Working Papers 1101, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy), revised Jun 2011.
    • Handle: RePEc:sgo:wpaper:1101
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    References listed on IDEAS

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    Cited by:

    1. Trapani, Lorenzo, 2013. "On bootstrapping panel factor series," Journal of Econometrics, Elsevier, vol. 172(1), pages 127-141.
    2. Jörg Breitung & In Choi, 2013. "Factor models," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 11, pages 249-265, Edward Elgar Publishing.
      • In Choi & Jorg Breitung, 2011. "Factor models," Working Papers 1121, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy), revised Dec 2011.
    3. Yunus Emre Ergemen, 2016. "Generalized Efficient Inference on Factor Models with Long-Range Dependence," CREATES Research Papers 2016-05, Department of Economics and Business Economics, Aarhus University.
    4. Zhou, X. & Solberger, M., 2013. "A Lagrange multiplier-type test for idiosyncratic unit roots in the exact factor model under misspecification," Research Memorandum 058, Maastricht University, Graduate School of Business and Economics (GSBE).

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    Keywords

    factor model; unit root; generalized principal component estimation; feasible generalized principal component estimation;
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