A criterion for the number of factors in a data-rich environment

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

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This paper derives a new criterion for the determination of the number of factors in static approximate factor models, that is strongly associated with the scree test. Our criterion looks for the number of eigenvalues for which the difference between adjacent eigenvalue-component number blocks is maximized. Monte Carlo experiments compare the properties of our criterion to the Edge Distribution (ED) estimator of Onatski (2010) and the two eigenvalue ratio estimators of Ahn and Horenstein (2013). Our criterion outperforms the latter two for all sample sizes and the ED estimator of Onatski (2010) for samples up to 300 variables/observations
Originele taal-2English
Plaats van productieGroningen
UitgeverUniversity of Groningen, SOM research school
Aantal pagina's29
Volume14008-EEF
StatusPublished - 2014

Publicatie series

NaamSOM Research Reports
UitgeverijUniversity of Groningen, SOM Research School
Volume14008-EEF

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