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A Multilevel Factor Model: Identification, Asymptotic Theory and Applications

Listed author(s):
  • In Choi

    ()

    (School of Economics, Sogang University, Seoul)

  • Dukpa Kim

    (Department of Economics, Korea University, Seoul)

  • Yun Jung Kim

    ()

    (School of Economics, Sogang University, Seoul)

  • Noh-Sun Kwark

    ()

    (School of Economics, Sogang University, Seoul)

This paper studies a multilevel factor model with global and country factors. The global factors affect all individuals while the country factors affect only those within each specific country. A sequential procedure to identify the global and country factors separately is proposed. In the initial step, the global factors are estimated by canonical correlation analysis. Using this initial estimator, the principal component estimators (PCEs) of the global and country factors are constructed. It is shown that the PCEs estimate the spaces of the global and country factors consistently and are normally distributed in the limit. Several information criteria that can estimate the numbers of the country factors are proposed. The number of the global factors is assumed to be known. Extensive simulation results demonstrate that the sequential procedure and the information criteria work well in finite samples. The method of this paper is applied to 25 OECD countries to identify international business cycle. It is reported that the method extracts a global factor reasonably well.

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File URL: ftp://163.239.156.99/wpaper/CI_RIME_2016_09.pdf
File Function: Recent version, 2016
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Paper provided by Research Institute for Market Economy, Sogang University in its series Working Papers with number 1609.

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Length: 53 pages
Date of creation: 2016
Handle: RePEc:sgo:wpaper:1609
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