DP11440 Eigenvalue Ratio Estimators for the Number of Common Factors
|Author(s):||Maddalena Cavicchioli, Mario Forni, Marco Lippi, Paolo Zaffaroni|
|Publication Date:||August 2016|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11440|
In this paper we introduce three dynamic eigenvalue ratio estimators for the number of dynamic factors. Two of them, the Dynamic Eigenvalue Ratio (DER) and the Dynamic Growth Ratio (DGR) are dynamic counterparts of the eigenvalue ratio estimators (ER and GR) proposed by Ahn and Horenstein (2013). The third, the Dynamic eigenvalue Difference Ratio (DDR), is a new one but closely related to the test statistic proposed by Onatsky (2009). The advantage of such estimators is that they do not require preliminary determination of discretionary parameters. Finally, a static counterpart of the latter estimator, called eigenvalue Difference Ratio estimator (DR), is also proposed. We prove consistency of such estimators and evaluate their performance under simulation. We conclude that both DDR and DR are valid alternatives to existing criteria. Application to real data gives new insights on the number of factors driving the US economy.