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Analyzing International Business and Financial Cycles using Multi-Level Factor Models: A Comparison of Alternative Approaches

In: Dynamic Factor Models

Author

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  • Breitung Jörg
  • Eickmeier Sandra

Abstract

This paper compares alternative estimation procedures for multi-level factor models which imply blocks of zero restrictions on the associated matrix of factor loadings. We suggest a sequential least squares algorithm for minimizing the total sum of squared residuals and a two-step approach based on canonical correlations that are much simpler and faster than Bayesian approaches previously employed in the literature. An additional advantage is that our approaches can be used to estimate more complex multi-level factor structures where the number of levels is greater than two. Monte Carlo simulations suggest that the estimators perform well in typical sample sizes encountered in the factor analysis of macroeconomic data sets. We apply the methodologies to study international comovements of business and financial cycles.

Suggested Citation

  • Breitung Jörg & Eickmeier Sandra, 2016. "Analyzing International Business and Financial Cycles using Multi-Level Factor Models: A Comparison of Alternative Approaches," Advances in Econometrics, in: Dynamic Factor Models, volume 35, pages 177-214, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-905320150000035005
    DOI: 10.1108/S0731-905320150000035005
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    Citations

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    Cited by:

    1. Ergemen, Yunus Emre & Rodríguez-Caballero, C. Vladimir, 2023. "Estimation of a dynamic multi-level factor model with possible long-range dependence," International Journal of Forecasting, Elsevier, vol. 39(1), pages 405-430.
    2. Servén, Luis & Abate, Girum Dagnachew, 2020. "Adding space to the international business cycle," Journal of Macroeconomics, Elsevier, vol. 65(C).
    3. Kose, M. Ayhan & Ha, Jongrim & Otrok, Christopher & Prasad, Eswar, 2020. "Global Macro-Financial Cycles and Spillovers," CEPR Discussion Papers 14404, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Factor models; canonical correlations; international business cycles; financial cycles; business cycle asymmetries; C38; C55;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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