Weak Factor Analysis via Temporally Weighted PCA

Zhongyuan Lyu and Ming Yuan

Papers from arXiv.org

Abstract: Principal component analysis (PCA) is arguably the most widely used approach for large-dimensional factor analysis. While it is effective when the factors are sufficiently strong, it can be inconsistent when the factors are weak and/or the noise has complex dependence structure. We argue that the inconsistency often stems from bias and introduce a general approach to restore consistency. Specifically, we propose a general weighting scheme for PCA and show that suitable weights can restore consistency for much weaker factors under the dependent-noise structures allowed by our model. Under the stronger signal-to-noise conditions needed for inference, we also establish asymptotic normality of the loading and factor estimators. While an oracle weighting matrix may require knowledge about the factors and covariance of the idiosyncratic noise that are not known a priori, we develop an agnostic approach to adaptively choose from a large class of weighting matrices that can be viewed as PCA for weighted linear combinations of auto-covariances among the observations. Theoretical and numerical results demonstrate the merits of our methodology over the usual PCA and other recently developed techniques for large-dimensional approximate factor models.

Date: 2025-08, Revised 2026-10
New Economics Papers: this item is included in nep-ecm and nep-ets
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