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Efficient Estimation of Nonstationary Factor Models

Listed author(s):
  • In Choi

    ()

    (Department of Economics, Sogang University, Seoul)

Registered author(s):

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 e¡Ë - ciency gain over the conventional principal component estimator. Second, this paper extends the conventional static factor model to those with time polyno- mials, and studies the GPCE for the models. The GPCE continues to have an e¡Ë ciency 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 compo- nent estimator. Last, asymptotic equivalence of the GPCE and feasible GPCE (FGPCE) of the factor space is established.

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File URL: ftp://163.239.156.99/wpaper/CI_RIME_2011-03.pdf
File Function: First version, 2011
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Paper provided by Research Institute for Market Economy, Sogang University in its series Working Papers with number 1101.

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Length: 44 pages
Date of creation: Jun 2011
Date of revision: Jun 2011
Handle: RePEc:sgo:wpaper:1101
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Web page: http://econdept.sogang.ac.kr/laboratory/information.do
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