A criterion for the number of factors

Ard H. J. de Reijer, Jan P. A. M. Jacobs*, Pieter W. Otter

*Corresponding author for this work

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Abstract

This note proposes a new criterion for the determination of the number of factors in an approximate static factor model. The criterion is strongly associated with the scree test and compares the differences between consecutive eigenvalues to a threshold. The size of the threshold is derived from a hyperbola and depends only on the sample size and the number of factors k. Monte Carlo simulations compare its properties with well-established estimators from the literature. Our criterion shows similar results as the standard implementations of these estimators, but is not prone to a lack of robustness against a too large a priori determined maximum number of factors kmax.
Original languageEnglish
Pages (from-to)4293-4299
Number of pages7
JournalCommunications in Statistics - Theory and Methods
Volume50
Issue number18
Early online date6-Mar-2020
DOIs
Publication statusPublished - 2021

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