Eigenvalue Ratio Estimators for the Number of Common Factors

Mario Forni, Maddalena Cavicchioli, Marco Lippi and Paolo Zaffaroni

No 11440, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper we introduce three dynamic eigenvalue ratio estimators for the number of dynamic factors. Two of them, the Dynamic Eigenvalue Ratio (DER) and the Dynamic Growth Ratio (DGR) are dynamic counterparts of the eigenvalue ratio estimators (ER and GR) proposed by Ahn and Horenstein (2013). The third, the Dynamic eigenvalue Di fference Ratio (DDR), is a new one but closely related to the test statistic proposed by Onatsky (2009). The advantage of such estimators is that they do not require preliminary determination of discretionary parameters. Finally, a static counterpart of the latter estimator, called eigenvalue Diff erence Ratio estimator (DR), is also proposed. We prove consistency of such estimators and evaluate their performance under simulation. We conclude that both DDR and DR are valid alternatives to existing criteria. Application to real data gives new insights on the number of factors driving the US economy.

Date: 2016-08
New Economics Papers: this item is included in nep-ecm and nep-ets
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