Consistent estimation of time-varying loadings in high-dimensional factor models

Jakob Guldbæk Mikkelsen, Eric Hillebrand () and Giovanni Urga

Journal of Econometrics, 2019, vol. 208, issue 2, 535-562

Abstract: In this paper, we develop a two-step maximum likelihood estimator of time-varying loadings in high-dimensional factor models. We specify the loadings to evolve as stationary vector autoregressions (VAR) and show that consistent estimates of the loadings parameters can be obtained. In the first step, principal components are extracted from the data to form factor estimates. In the second step, the parameters of the loadings VARs are estimated as a set of linear regression models with time-varying coefficients. We document the finite-sample properties of the maximum likelihood estimator through an extensive simulation study and illustrate the empirical relevance of the time-varying loadings structure using a large quarterly dataset for the US economy.

Keywords: Factor models; Time-varying loadings; Consistent estimation; Maximum likelihood estimation; Two-step estimation; Principal components (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:208:y:2019:i:2:p:535-562

DOI: 10.1016/j.jeconom.2018.09.020

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