A Generalized Factor Model with Local Factors

Simon Freyaldenhoven

2017 Papers from Job Market Papers

Abstract: I extend the theory on factor models by incorporating âlocalâ factors into the model. Local factors affect a decreasing fraction of the observed variables. This implies a continuum of eigenvalues of the covariance matrix, as is commonly observed in applications. I derive conditions under which local factors will be estimated consistently using the common Principal Component Estimator. I further propose a novel class of estimators for the number of factors. Unlike estimators that have been proposed in the past, my estimators use information in the eigenvectors as well as in the eigenvalues. Monte Carlo evidence suggests significant finite sample gains over existing estimators. Empirically I find evidence of local factors in a large panel of US macroeconomic indicators.

JEL-codes: C38 C52 C55 (search for similar items in EconPapers)
Date: 2017-11-16
New Economics Papers: this item is included in nep-ecm and nep-ore
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: A Generalized Factor Model with Local Factors (2019)
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