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Eigenvalue Ratio Estimators for the Number of Dynamic Factors

Maddalena Cavicchioli (), Mario Forni (), Marco Lippi () and Paolo Zaffaroni ()

Center for Economic Research (RECent) from University of Modena and Reggio E., Dept. of Economics "Marco Biagi"

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 Difference 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 Difference 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.

Keywords: Generalized dynamic factor model; dynamic principal components; number of factors; static factor model (search for similar items in EconPapers)
JEL-codes: C01 C13 C38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ore
Date: 2016-10
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