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

Jinshan Liu, Jiazhu Pan, Qiang Xia, Li Xiao

Research output: Contribution to journalArticlepeer-review

16 Downloads (Pure)

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.

Original languageEnglish
Pages (from-to)285-298
Number of pages14
JournalStudies in Nonlinear Dynamics and Econometrics
Volume27
Issue number3
Early online date3 Oct 2022
DOIs
Publication statusPublished - 28 Jun 2023

Keywords

  • approximate factor model
  • ridge-type method
  • cumulative contribution rate
  • eigenvalue ratio
  • number of factors

Fingerprint

Dive into the research topics of 'On determination of the number of factors in an approximate factor model'. Together they form a unique fingerprint.

Cite this