Improved penalization for determining the number of factors in approximate factor models

L. Alessi, M. Barigozzi, M. Capasso

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

The procedure proposed by Bai and Ng (2002) for identifying the number of factors in static factor models is revisited. In order to improve its performance, we introduce a tuning multiplicative constant in the penalty, an idea that was proposed by Hallin and Liska (2007) in the context of dynamic factor models. Simulations show that our method in general delivers more reliable estimates, in particular in the case of large idiosyncratic disturbances.

Original languageEnglish
Pages (from-to)1806-1813
Number of pages8
JournalStatistics & Probability Letters
Volume80
Issue number23-24
DOIs
Publication statusPublished - 1 Dec 2010

Keywords

  • Number of factors
  • Approximate factor models
  • Information criterion
  • Model selection
  • DYNAMIC-FACTOR MODEL

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