On determination of the number of factors in an approximate factor model

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Liu, Jinshan and Pan, Jiazhu and Xia, Qiang and Xiao, Li (2023) On determination of the number of factors in an approximate factor model. Studies in Nonlinear Dynamics and Econometrics, 27 (3). pp. 285-298. ISSN 1558-3708 (https://doi.org/10.1515/snde-2020-0055)

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Abstract

This paper proposes a ridge-type method for determining the number of factors in an approximate factor model. The new estimator of factor number is obtained by maximizing both the ratio of two adjacent eigenvalues and the cumulative contribution rate of the factors which represents the explanatory power of the common factors for response variables. Our estimator is proved to be as asymptotically consistent as those in (Ahn, S., and A. Horenstein. 2013. "Eigenvalue Ratio Test for the Number of Factors."Econometrica 81: 1203-27). But Monte Carlo simulation experiments show our method has better correct selection rates in finite sample cases. A real data example is given for illustration.

ORCID iDs

Liu, Jinshan, Pan, Jiazhu ORCID logoORCID: https://orcid.org/0000-0001-7346-2052, Xia, Qiang and Xiao, Li;
  • Item type:Article
    ID code:81284
    Dates:
    Date
    Event
    28 June 2023
    Published
    3 October 2022
    Published Online
    3 June 2022
    Accepted
    Subjects:Science > Mathematics
    Department:Faculty of Science > Mathematics and Statistics
    Depositing user: Pure Administrator
    Date deposited:27 Jun 2022 15:55
    Last modified:17 Dec 2024 01:26
    URI:https://strathprints.strath.ac.uk/id/eprint/81284
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