A Distributed Lag Approach to the Generalised Dynamic Factor Model

Philipp Gersing

Papers from arXiv.org

Abstract: We propose a new estimator for the Generalised Dynamic Factor Model (GDFM) that simplifies estimation by avoiding frequency-domain methods. Our key theoretical insight shows that under reasonable conditions the dynamic common component can be represented in terms of a finite number of lags of contemporaneously pervasive factors. In this case the dynamic factor decomposition of the GDFM reduces to the OLS regression of observed variables on estimated factors and their lags, with factors obtained via static principal components. The approach naturally accommodates weak (non-pervasive) factors within the dynamic common space addressing an important limitation of existing methods. We establish consistency and asymptotic normality for both the dynamic and weak common components. An application to a large European macroeconomic dataset demonstrates strong empirical performance and uncovers a sizeable weak common component - particularly in sentiment indicators and several other variables - revealing dynamics that standard methods overlook.

Date: 2024-10, Revised 2026-05
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-inv
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