Discussion paper

DP1285 Dynamic Common Factors in Large Cross-Sections

This paper develops a method to analyse large cross-sections with non-trivial time dimensions. The method: (i) identifies the number of common shocks in a factor analytic model; (ii) estimates the unobserved common dynamic component; (iii) shows how to test for fundamentality of the common shocks; and (iv) quantifies positive and negative comovements at each frequency. We illustrate how the proposed techniques can be used for analysing features of the business cycle and economic growth.


Reichlin, L and M Forni (eds) (1995), “DP1285 Dynamic Common Factors in Large Cross-Sections”, CEPR Press Discussion Paper No. 1285. https://cepr.org/publications/dp1285