Determining the number of factors in approximate factor models with global and group-specific factors

António Rua and Francisco Craveiro Dias
Authors registered in the RePEc Author Service: Maximiano Pinheiro

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: For an approximate factor model, in a static representation, with a common component comprising global factors and factors specific to groups of variables, the consistency of the principal components estimator is discussed. An extension of the well known Bai and Ng criteria is proposed for determining the number of global and group-specific factors. The consistency of the suggested criteria is established and the small sample properties are assessed through Monte Carlo simulations. As an empirical illustration, the proposed criteria is applied to estimate the number of global and country-specific macroeconomic factors for the major euro area countries.

JEL-codes: C32 C52 (search for similar items in EconPapers)
Date: 2008
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