Selecting the Correct Number of Factors in Approximate Factor Models : The Large Panel Case With Group Bridge Estimators
Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review
Author(s)
Related Research Unit(s)
Detail(s)
Original language | English |
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Pages (from-to) | 359-374 |
Journal / Publication | Journal of Business and Economic Statistics |
Volume | 32 |
Issue number | 3 |
Online published | 28 Jul 2014 |
Publication status | Published - Jul 2014 |
Link(s)
Abstract
This article proposes a group bridge estimator to select the correct number of factors in approximate factor models. It contributes to the literature on shrinkage estimation and factor models by extending the conventional bridge estimator from a single equation to a large panel context. The proposed estimator can consistently estimate the factor loadings of relevant factors and shrink the loadings of irrelevant factors to zero with a probability approaching one. Hence, it provides a consistent estimate for the number of factors. We also propose an algorithm for the new estimator; Monte Carlo experiments show that our algorithm converges reasonably fast and that our estimator has very good performance in small samples. An empirical example is also presented based on a commonly used U.S. macroeconomic dataset.
Research Area(s)
- Bridge estimation, Common factors, Selection consistency
Citation Format(s)
Selecting the Correct Number of Factors in Approximate Factor Models : The Large Panel Case With Group Bridge Estimators. / Caner, Mehmet; Han, Xu.
In: Journal of Business and Economic Statistics, Vol. 32, No. 3, 07.2014, p. 359-374.Research output: Journal Publications and Reviews (RGC: 21, 22, 62) › 21_Publication in refereed journal › peer-review