Standardization and estimation of factor numbers for panel data
- Authors
- Greenaway-McGrevy, R.; Han, C.; Sul, D.
- Issue Date
- 2012
- Keywords
- Bai-Ng criteria; Factor model; Panel data; Principal components estimator; Selection criteria; Standarization
- Citation
- Journal of Economic Theory and Econometrics, v.23, no.2, pp.79 - 88
- Indexed
- SCOPUS
KCI
- Journal Title
- Journal of Economic Theory and Econometrics
- Volume
- 23
- Number
- 2
- Start Page
- 79
- End Page
- 88
- URI
- https://scholar.korea.ac.kr/handle/2021.sw.korea/110753
- ISSN
- 1229-2893
- Abstract
- Practitioners often standardize panel data before estimating a factor model. In this paper we show an example that the standardization leads to inconsistent estimation of the factor number. When the common component exhibits strong heteroskedasticity, the conventional eigenvalue-based decompositions are consistent but standardization does not necessarily result in consistent estimation. To overcome this issue, we recommend using a minimum-rule whereby the minimum factor-number estimated from both the conventional and standardized panel is used. Monte Carlo studies and an empirical application are provided.
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Collections - College of Political Science & Economics > Department of Economics > 1. Journal Articles
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