Determining the Number of Factors in Approximate Factor Models

Jushan Bai () and Serena Ng ()

No 440, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: In this paper we develop some econometric theory for factor models of large dimensions. The focus is the determination of the number of factors, which is an unresolved issue in the rapidly growing literature on multifactor models. We propose some panel C(p) criteria and show that the number of factors can be consistently estimated using the criteria. The theory is developed under the framework of large cross-sections (N) and large time dimensions (T). No restriction is imposed on the relation between N and T. Simulations show that the proposed criteria yield almost precise estimates of the number of factors for configurations of the panel data encountered in practice.

Keywords: Factor analysis; asset pricing; principal components; model selection (search for similar items in EconPapers)
JEL-codes: C13 C33 C43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-fmk
Date: 2000-04-03
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Forthcoming, Econometrica

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Related works:
Working Paper: Determining the Number of Factors in Approximate Factor Models (2000)
Journal Article: Determining the Number of Factors in Approximate Factor Models (2002)
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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:440

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