A Dynamic Multi-Level Factor Model with Long-Range Dependence

Yunus Emre Ergemen () and Carlos Vladimir Rodríguez-Caballero ()
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Yunus Emre Ergemen: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Carlos Vladimir Rodríguez-Caballero: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Authors registered in the RePEc Author Service: Carlos Vladimir Rodriguez Caballero

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: A dynamic multi-level factor model with stationary or nonstationary global and regional factors is proposed. In the model, persistence in global and regional common factors as well as innovations allows for the study of fractional cointegrating relationships. Estimation of global and regional common factors is performed in two steps employing canonical correlation analysis and a sequential least-squares algorithm. Selection of the number of global and regional factors is discussed. The small sample properties of our methodology are investigated by some Monte Carlo simulations. The method is then applied to the Nord Pool power market for the analysis of price comovements among different regions within the power grid. We find that the global factor can be interpreted as the system price of the power grid as well as a fractional cointegration relationship between prices and the global factor.

Keywords: Multi-level factor; long memory; fractional cointegration; electricity prices (search for similar items in EconPapers)
JEL-codes: C12 C22 (search for similar items in EconPapers)
Pages: 40
Date: 2016-08-12
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (2)

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