Determining the Number of Factors in Approximate Factor Models

Jushan Bai () and Serena Ng ()

No 1504, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: In this paper we develop some statistical 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 a panel C_p criterion and show that the number of factors can be consistently estimated using the criterion. 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 criterion yields almost precise estimates of the number of factors for configurations of the panel data encountered in practice.

Date: 2000-08-01
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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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