How to select the number of factors in break point estimation of high-dimensional factor models?

Jingjie Xiang

Economics Letters, 2025, vol. 254, issue C

Abstract: Predetermining the number of factors is required in break date estimation of high-dimensional factor models. In a model with ra (rb) pre-break (post-break) factors, this paper shows the consistency of least squares (LS) break fraction estimator when the number of pre-break (post-break) factors is arbitrarily set to a value between ra (rb) and the total number of pseudo factors minus one. Monte Carlo evidence suggests that break date estimation based on the number of pseudo factors enjoys higher accuracy than that based on the true numbers of pre- and post-break factors. This advantage becomes more obvious as the gap between ra and rb widens. Thus, break date estimation based on the number of pseudo factors remains a good choice when the numbers of pre- and post break factors are different.

Keywords: High-dimensional factor models; Structural break; Number of factors (search for similar items in EconPapers)
JEL-codes: C23 C55 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:254:y:2025:i:c:s0165176525003076

DOI: 10.1016/j.econlet.2025.112470

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