Approximate Factor Models with Weaker Loadings

Jushan Bai and Serena Ng ()

Papers from arXiv.org

Abstract: Pervasive cross-section dependence is increasingly recognized as a characteristic of economic data and the approximate factor model provides a useful framework for analysis. Assuming a strong factor structure where $\Lop\Lo/N^\alpha$ is positive definite in the limit when $\alpha=1$, early work established convergence of the principal component estimates of the factors and loadings up to a rotation matrix. This paper shows that the estimates are still consistent and asymptotically normal when $\alpha\in(0,1]$ albeit at slower rates and under additional assumptions on the sample size. The results hold whether $\alpha$ is constant or varies across factor loadings. The framework developed for heterogeneous loadings and the simplified proofs that can be also used in strong factor analysis are of independent interest.

Date: 2021-09, Revised 2023-03
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-isf
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Citations: View citations in EconPapers (19)

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Journal Article: Approximate factor models with weaker loadings (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2109.03773

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