In this paper we develop some econometric theory for factor models of large dimensions. The focus is the determination of the number of factors, which is an unresolved issue in the rapidly growing literature on multifactor models. We propose some panel C(p) criteria and show that the number of factors can be consistently estimated using the criteria. The theory is developed under the framework of large cross-sections (N) and large time dimensions (T). No restriction is imposed on the relation between N and T. Simulations show that the proposed criteria yield almost precise estimates of the number of factors for configurations of the panel data encountered in practice.
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Length: 32 pages Date of creation: 03 Apr 2000 Date of revision: Publication status: forthcoming, Econometrica Handle: RePEc:boc:bocoec:440
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Find related papers by JEL classification: C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
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John H. Cochrane, 1999.
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James H. Stock & Mark W. Watson, 1999.
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Gregory, Allan W & Head, Allen C & Raynauld, Jacques, 1997.
"Measuring World Business Cycles,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 677-701, August.
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