On the determination of the number of factors using information criteria with data-driven penalty

Joakim Westerlund and Sagarika Mishra
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Sagarika Mishra: Deakin University

Statistical Papers, 2017, vol. 58, issue 1, No 9, 184 pages

Abstract: Abstract As is well known, when using an information criterion to select the number of common factors in factor models the appropriate penalty is generally indetermine in the sense that it can be scaled by an arbitrary constant, c say, without affecting consistency. In an influential paper, Hallin and Liška (J Am Stat Assoc 102:603–617, 2007) proposes a data-driven procedure for selecting the appropriate value of c. However, by removing one source of indeterminacy, the new procedure simultaneously creates several new ones, which make for rather complicated implementation, a problem that has been largely overlooked in the literature. By providing an extensive analysis using both simulated and real data, the current paper fills this gap.

Keywords: Panel data; Common factor model; Information criterion; Data-driven penalty; C12; C13; C33 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s00362-015-0692-0

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