Investigating Finite Sample Properties of Estimators for Approximate Factor Models When N Is Small

Shinya Tanaka and Eiji Kurozumi ()

Global COE Hi-Stat Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This paper examines the finite sample properties of estimators for approximate factor models when N is small via simulation study. Although the "rule-of-thumb" for factor models does not support using approximate factor models when N is small, we find that the principal component analysis estimator and quasi-maximum likelihood estimator proposed by Doz et al. (2008) perform very well even in this case. Our findings provide an opportunity for applying approximate factor models to low-dimensional data, which was thought to have been inappropriate for a long time.

Keywords: Approximate factor model; Principal components; Quasi-maximum likelihood (search for similar items in EconPapers)
JEL-codes: C32 C33 C63 (search for similar items in EconPapers)
Date: 2010-12
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Journal Article: Investigating finite sample properties of estimators for approximate factor models when N is small (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:hst:ghsdps:gd10-156

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