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On the determination of the number of factors using information criteria with data-driven penalty

Author

Listed:
  • Joakim Westerlund

    (Deakin University
    Lund University)

  • Sagarika Mishra

    (Deakin University)

Abstract

As is well known, when using an information criterion to select the number of common factors in factor models the appropriate penalty is generally indetermine in the sense that it can be scaled by an arbitrary constant, c say, without affecting consistency. In an influential paper, Hallin and Liška (J Am Stat Assoc 102:603–617, 2007) proposes a data-driven procedure for selecting the appropriate value of c. However, by removing one source of indeterminacy, the new procedure simultaneously creates several new ones, which make for rather complicated implementation, a problem that has been largely overlooked in the literature. By providing an extensive analysis using both simulated and real data, the current paper fills this gap.

Suggested Citation

  • Joakim Westerlund & Sagarika Mishra, 2017. "On the determination of the number of factors using information criteria with data-driven penalty," Statistical Papers, Springer, vol. 58(1), pages 161-184, March.
    • Handle: RePEc:spr:stpapr:v:58:y:2017:i:1:d:10.1007_s00362-015-0692-0
    DOI: 10.1007/s00362-015-0692-0
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    References listed on IDEAS

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