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Wavelet Estimation for Dynamic Factor Models with Time-Varying Loadings

Duván Humberto Cataño (), Carlos Vladimir Rodríguez-Caballero () and Daniel Peña ()
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Duván Humberto Cataño: University of Antioquia, Postal: University of Antioquia, Calle 67 Número 53 - 108, P.O BOX 1226, Medellin, Colombia
Carlos Vladimir Rodríguez-Caballero: ITAM and CREATES, Postal: Department of Statistics, ITAM, Río Hondo No.1, Col. Progreso Tizapán, Álvaro Obregón, CDMX. 01080, Mexico
Daniel Peña: Universidad Carlos III de Madrid, Postal: Department of Statistics and Institute UC3M-BS of Financial Big Data, Universidad Carlos III de Madrid, Getafe, Spain

Authors registered in the RePEc Author Service: Carlos Vladimir Rodríguez Caballero ()

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

Abstract: We introduce a non-stationary high-dimensional factor model with time-varying loadings. We propose an estimation procedure based on two stages. First, we estimate common factors by principal components. Afterwards, in the second step, considering the factors estimates as observed, the time-varying loadings are estimated by an iterative procedure of generalized least squares using wavelet functions. We investigate the finite sample features of the proposed methodology by some Monte Carlo simulations. Finally, we use this methodology to study the electricity prices and loads of the Nord Pool power market.

Keywords: Factor models; wavelet functions; generalized least squares; electricity prices and loads (search for similar items in EconPapers)
JEL-codes: C13 C32 Q43 (search for similar items in EconPapers)
Pages: 28
Date: 2019-12-09
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-ore
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