1. Selecting the number of factors in multi‐variate time series.
- Author
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Caro, Angela and Peña, Daniel
- Subjects
- *
BIG data , *ECONOMIC forecasting , *RESEARCH personnel , *TIME series analysis , *DYNAMIC models - Abstract
How many factors are there? It is a critical question that researchers and practitioners deal with when estimating factor models. We proposed a new eigenvalue ratio criterion for the number of factors in static approximate factor models. It considers a pooled squared correlation matrix which is defined as a weighted combination of the main observed squared correlation matrices. Theoretical results are given to justify the expected good properties of the criterion, and a Monte Carlo study shows its good finite sample performance in different scenarios, depending on the idiosyncratic error structure and factor strength. We conclude comparing different criteria in a forecasting exercise with macroeconomic data. [ABSTRACT FROM AUTHOR]
- Published
- 2025
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