Sparse and Robust Factor Modelling

Christophe Croux () and Peter Exterkate ()
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Christophe Croux: K.U. Leuven, Belgium

No 11-122/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Factor construction methods are widely used to summarize a large panel of variables by means of a relatively small number of representative factors. We propose a novel factor construction procedure that enjoys the properties of robustness to outliers and of sparsity; that is, having relatively few nonzero factor loadings. Compared to more traditional factor construction methods, we find that this procedure leads to better interpretable factors and to a favorable forecasting performance, both in a Monte Carlo experiment and in two empirical applications to large data sets, one from macroeconomics and one from microeconomics.

Keywords: dimension reduction; forecasting; outliers; regularization (search for similar items in EconPapers)
JEL-codes: C38 C51 C53 (search for similar items in EconPapers)
Date: 2011-08-19
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20110122

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