EFFICIENT ESTIMATION OF FACTOR MODELS

In Choi

Econometric Theory, 2012, vol. 28, issue 2, 274-308

Abstract: This paper considers the factor model Xt = ΛFt + et. Assuming a normal distribution for the idiosyncratic error et conditional on the factors {Ft}, conditional maximum likelihood estimators of the factor and factor-loading spaces are derived. These estimators are called generalized principal component estimators (GPCEs) without the normality assumption. This paper derives asymptotic distributions of the GPCEs of the factor and factor-loading spaces. It is shown that variance of the GPCE of the common component is smaller than that of the principal component estimator studied in Bai (2003, Econometrica 71, 135–172). The approximate variance of the forecasting error using the GPCE-based factor estimates is derived and shown to be smaller than that based on the principal component estimator. The feasible GPCE (FGPCE) of the factor space is shown to be asymptotically equivalent to the GPCE. The GPCE and FGPCE are shown to be more efficient than the principal component estimator in finite samples.

Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (44)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
Working Paper: Efficient Estimation of Factor Models (2010)
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:cup:etheor:v:28:y:2012:i:02:p:274-308_00

Access Statistics for this article

More articles in Econometric Theory from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().