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Improved penalization for determining the number of factors in approximate factor models

Lucia Alessi (), Matteo Barigozzi and Marco Capasso ()

Statistics & Probability Letters, 2010, vol. 80, issue 23-24, 1806-1813

Abstract: The procedure proposed by Bai and Ng (2002) for identifying the number of factors in static factor models is revisited. In order to improve its performance, we introduce a tuning multiplicative constant in the penalty, an idea that was proposed by Hallin and Liska (2007) in the context of dynamic factor models. Simulations show that our method in general delivers more reliable estimates, in particular in the case of large idiosyncratic disturbances.

Keywords: Number; of; factors; Approximate; factor; models; Information; criterion; Model; selection (search for similar items in EconPapers)
Date: 2010
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