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Title: A Parametric Estimation Method for Dynamic Factor Models of Large Dimensions

Author(s): George Kapetanios and Massimiliano Marcellino

Publication Date: April 2006

Keyword(s): factor models, principal components and subspace algorithms

Programme Area(s): International Macroeconomics

Abstract: The estimation of dynamic factor models for large sets of variables has attracted considerable attention recently, due to the increased availability of large datasets. In this paper we propose a new parametric methodology for estimating factors from large datasets based on state space models and discuss its theoretical properties. In particular, we show that it is possible to estimate consistently the factor space. We also develop a consistent information criterion for the determination of the number of factors to be included in the model. Finally, we conduct a set of simulation experiments that show that our approach compares well with existing alternatives.

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Bibliographic Reference

Kapetanios, G and Marcellino, M. 2006. 'A Parametric Estimation Method for Dynamic Factor Models of Large Dimensions'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5620