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A Multilevel Factor Model: Identification, Asymptotic Theory and Applications

In Choi, Dukpa Kim (), Yun Jung Kim and Noh-Sun Kwark

No 1609, Working Papers from Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy)

Abstract: This paper studies a multilevel factor model with global and country factors. The global factors affect all individuals while the country factors affect only those within each specific country. A sequential procedure to identify the global and country factors separately is proposed. In the initial step, the global factors are estimated by canonical correlation analysis. Using this initial estimator, the principal component estimators (PCEs) of the global and country factors are constructed. It is shown that the PCEs estimate the spaces of the global and country factors consistently and are normally distributed in the limit. Several information criteria that can estimate the numbers of the country factors are proposed. The number of the global factors is assumed to be known. Extensive simulation results demonstrate that the sequential procedure and the information criteria work well in finite samples. The method of this paper is applied to 25 OECD countries to identify international business cycle. It is reported that the method extracts a global factor reasonably well.

Keywords: multilevel factor model; canonical correlation analysis; principal component estimator; information criteria; international business cycles. (search for similar items in EconPapers)
Pages: 53 pages
Date: 2016
New Economics Papers: this item is included in nep-ecm
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Journal Article: A multilevel factor model: Identification, asymptotic theory and applications (2018) Downloads
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