Title: Determining the Number of Factors in the General Dynamic Factor Model
Authors: HALLIN MarcLISKA ROMAN
Citation: JOURNAL OF THE AMERICAN STATISTICAL ASSOCIATION vol. 102 no. 478 p. 603-617
Publisher: AMER STATISTICAL ASSOC
Publication Year: 2007
JRC N°: JRC37816
ISSN: 0162-1459
URI: http://docserver.ingentaconnect.com/deliver/connect/asa/01621459/v102n478/s24.pdf?expires=1205914627&id=43053948&titleid=30000015&accname=Commissione+delle+Comunita+Europee&checksum=D874DAFC26A360F5C0D19DCE53CF5657
http://publications.jrc.ec.europa.eu/repository/handle/JRC37816
DOI: 10.1198/016214506000001275
Type: Articles in periodicals and books
Abstract: This article develops an information criterion for determining the number q of common shocks in the general dynamic factor model developed by Forni et al., as opposed to the restricted dynamic model considered by Bai and Ng and by Amengual and Watson. Our criterion is based on the fact that this number q is also the number of diverging eigenvalues of the spectral density matrix of the observations as the number n of series goes to infinity. We provide sufficient conditions for consistency of the criterion for large n and T (where T is the series length). We show how the method can be implemented and provide simulations and empirics illustrating its very good finite-sample performance. Application to real data adds a new empirical facet to an ongoing debate on the number of factors driving the U.S. economy.
JRC Directorate:Space, Security and Migration

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