A quasi maximum likelihood approach for large approximate dynamic factor models

Catherine Doz, Domenico Giannone and Lucrezia Reichlin

No 674, Working Paper Series from European Central Bank

Abstract: This paper considers quasi-maximum likelihood estimations of a dynamic approximate factor model when the panel of time series is large. Maximum likelihood is analyzed under different sources of misspecification: omitted serial correlation of the observations and cross-sectional correlation of the idiosyncratic components. It is shown that the effects of misspecification on the estimation of the common factors is negligible for large sample size (T) and the cross sectional dimension (n). The estimator is feasible when n is large and easily implementable using the Kalman smoother and the EM algorithm as in traditional factor analysis. Simulation results illustrate what are the empirical conditions in which we can expect improvement with respect to simple principle components considered by Bai (2003), Bai and Ng (2002), Forni, Hallin, Lippi, and Reichlin (2000, 2005b), Stock and Watson (2002a,b). JEL Classification: C51, C32, C33

Keywords: factor model; large cross-sections; Quasi Maximum Likelihood. (search for similar items in EconPapers)
Date: 2006-09
Note: 93468
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (102)

Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp674.pdf (application/pdf)

Related works:
Journal Article: A Quasi–Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models (2012)
Working Paper: A Quasi Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models (2012)
Working Paper: A Quasi Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models (2012)
Working Paper: A Quasi Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models (2012)
Working Paper: A Quasi Maximum Likelihood Approach for Large Approximate Dynamic Factor Models (2008)
Working Paper: A Quasi Maximum Likelihood Approach for Large Approximate Dynamic Factor Models (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2006674

Access Statistics for this paper

More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().