A Suggestion for a Dynamic Multi Factor Model (DMFM)

Heather Gibson, Stephen Hall and George Tavlas

No 282, Working Papers from Bank of Greece

Abstract: We provide a new way of deriving a number of dynamic unobserved factors from a set of variables. We show how standard principal components may be expressed in state space form and estimated using the Kalman filter. To illustrate our procedure we perform two exercises. First, we use it to estimate a measure of the current-account imbalances among northern and southern euro-area countries that developed during the period leading up to the outbreak of the euro-area crisis, before looking at adjustment in the post-crisis period. Second, we show how these dynamic factors can improve forecasting of the euro-dollar exchange rate.

Keywords: Principal Components; Factor Models; Underlying activity; Forecasts (search for similar items in EconPapers)
JEL-codes: E3 G01 G14 G21 (search for similar items in EconPapers)
Pages: 30
Date: 2020-07
New Economics Papers: this item is included in nep-ecm, nep-eec, nep-ets and nep-mac
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Journal Article: A SUGGESTION FOR A DYNAMIC MULTIFACTOR MODEL (DMFM) (2022)
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