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Estimating the number of common factors in serially dependent approximate factor models

Authors
Journal
Economics Letters
0165-1765
Publisher
Elsevier
Volume
116
Issue
3
Identifiers
DOI: 10.1016/j.econlet.2012.03.031
Keywords
  • Factor Model
  • Prewhitening
  • Least Squares Dummy Variable (Lsdv) Filter
  • Factor Number Estimation
  • Cross-Section Dependence

Abstract

Highlights ► Bai–Ng factor number estimates can be biased upwards under serial dependence. ► We suggest filtering the panel with an AR(1) model before applying Bai–Ng criteria. ► The method is consistent under a broader range of serial dependence processes. ► The method performs well in small-sample Monte Carlo simulations.

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