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Wavelet Estimation for Dynamic Factor Models with Time-Varying Loadings

Author

Listed:
  • Duván Humberto Cataño

    (University of Antioquia)

  • Carlos Vladimir Rodríguez-Caballero

    (ITAM and CREATES)

  • Daniel Peña

    (Universidad Carlos III de Madrid)

Abstract

We introduce a non-stationary high-dimensional factor model with time-varying loadings. We propose an estimation procedure based on two stages. First, we estimate common factors by principal components. Afterwards, in the second step, considering the factors estimates as observed, the time-varying loadings are estimated by an iterative procedure of generalized least squares using wavelet functions. We investigate the finite sample features of the proposed methodology by some Monte Carlo simulations. Finally, we use this methodology to study the electricity prices and loads of the Nord Pool power market.

Suggested Citation

  • Duván Humberto Cataño & Carlos Vladimir Rodríguez-Caballero & Daniel Peña, 2019. "Wavelet Estimation for Dynamic Factor Models with Time-Varying Loadings," CREATES Research Papers 2019-23, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2019-23
    as

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    File URL: https://repec.econ.au.dk/repec/creates/rp/19/rp19_23.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Factor models; wavelet functions; generalized least squares; electricity prices and loads;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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