Model Selection for Factor Analysis: Some New Criteria and Performance Comparisons

In Choi

No 1209, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: This paper derives Akaike?s (1973) Akaike information criterion (AIC), Hur- vich and Tsai?s (1989) corrected AIC, the Bayesian information criterion (BIC) of Akaike (1978) and Schwarz (1978), and Hannan and Quinn?s (1979) informa- tion criterion for factor models and studies the consistency properties of these information criteria. It also reports extensive simulation results comparing the performance of the extant and new procedures for the selection of the number of factors. The data generating process for the simulation consists of serially cor- related factors and serially and cross-sectionally correlated idiosyncratic errors. The idiosyncratic errors are either homoskedastic or heteroskedastic. Idiosyn- cratic errors with fat tails and those with outliers having a much larger variance than the rest of the errors are also considered. The simulation results show the di¡Ë culty of determining which criterion performs best. In practice, it is advisable to consider several criteria at the same time, especially BIC, Hannan and Quinn?s information criterion, Bai and Ng?s (2002) IC p2 and BIC3, and Onatski?s (2010) and Ahn and Horenstein?s (2009) eigenvalue-based criteria. The model-selection criteria considered in this paper are also applied to Stock and Watson?s (2002, 2005) data sets. The results di¢´er considerably depending on the model-selectioncriterion in use, but evidence suggesting four factors for Stock and Watson?s (2002) data and six or seven factors for Stock and Watson?s (2005) is obtainable.

Keywords: Factor model; Akaike information criterion; corrected Akaike information criterion; Bayesian information criterion; Hannan and Quinn?s (1979) information criterion (search for similar items in EconPapers)
Pages: 85 pages
Date: 2012
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://tinyurl.com/yukadpxv first version, 2012 (application/pdf)

Related works:
Journal Article: Model selection for factor analysis: Some new criteria and performance comparisons (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sgo:wpaper:1209

Access Statistics for this paper

More papers in Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy) Contact information at EDIRC.
Bibliographic data for series maintained by Jung Hur ().