In this paper we introduce three dynamic eigenvalue ratio estimators for the number of dynamic factors. Two of them, the Dynamic Eigenvalue Ratio (DER) and the Dynamic Growth Ratio (DGR) are dynamic counterparts of the eigenvalue ratio estimators (ER and GR) proposed by Ahn and Horenstein (2013). The third, the Dynamic eigenvalue Difference Ratio (DDR), is a new one but closely related to the test statistic proposed by Onatsky (2009). The advantage of such estimators is that they do not require preliminary determination of discretionary parameters. Finally, a static counterpart of the latter estimator, called eigenvalue Difference Ratio estimator (DR), is also proposed. We prove consistency of such estimators and evaluate their performance under simulation. We conclude that both DDR and DR are valid alternatives to existing criteria. Application to real data gives new insights on the number of factors driving the US economy.

Eigenvalue Ratio Estimators for the Number of Common Factors / Cavicchioli, Maddalena; Forni, Mario; Lippi, Marco; Zaffaroni, Paolo. - In: CENTRE FOR ECONOMIC POLICY RESEARCH DISCUSSION PAPERS. - ISSN 1442-8636. - (2016), pp. 1-38.

Eigenvalue Ratio Estimators for the Number of Common Factors

Maddalena Cavicchioli;Mario Forni;Marco Lippi;
2016

Abstract

In this paper we introduce three dynamic eigenvalue ratio estimators for the number of dynamic factors. Two of them, the Dynamic Eigenvalue Ratio (DER) and the Dynamic Growth Ratio (DGR) are dynamic counterparts of the eigenvalue ratio estimators (ER and GR) proposed by Ahn and Horenstein (2013). The third, the Dynamic eigenvalue Difference Ratio (DDR), is a new one but closely related to the test statistic proposed by Onatsky (2009). The advantage of such estimators is that they do not require preliminary determination of discretionary parameters. Finally, a static counterpart of the latter estimator, called eigenvalue Difference Ratio estimator (DR), is also proposed. We prove consistency of such estimators and evaluate their performance under simulation. We conclude that both DDR and DR are valid alternatives to existing criteria. Application to real data gives new insights on the number of factors driving the US economy.
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Eigenvalue Ratio Estimators for the Number of Common Factors / Cavicchioli, Maddalena; Forni, Mario; Lippi, Marco; Zaffaroni, Paolo. - In: CENTRE FOR ECONOMIC POLICY RESEARCH DISCUSSION PAPERS. - ISSN 1442-8636. - (2016), pp. 1-38.
Cavicchioli, Maddalena; Forni, Mario; Lippi, Marco; Zaffaroni, Paolo
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11380/1156572
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