Transformed contribution ratio test for the number of factors in static approximate factor models

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A Testing Procedure for Determining the Number of Factors in Approximate Factor Models with Large Datasets

The paradigm of a factor model is very appealing and has been used extensively in economic analyses. Underlying the factor model is the idea that a large number of economic variables can be adequately modelled by a small number of indicator variables. Throughout this extensive research activity on large dimensional factor models a major preoccupation has been the development of tools for determ...

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A Robust Criterion for Determining the Number of Factors in Approximate Factor Models

We modify the criterion by Bai and Ng (2002) for determining the number of factors in approximate factor models. As in the original criterion, for any given number of factors we estimate the common and idiosyncratic components of the model by applying principal component analysis. We select the true number of factors as the number that minimizes the variance explained by the idiosyncratic compo...

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ژورنال

عنوان ژورنال: Computational Statistics & Data Analysis

سال: 2017

ISSN: 0167-9473

DOI: 10.1016/j.csda.2017.03.005