Is maximum likelihood suitable for factor models in large cross-sections of time series? We answer this question from both an asymptotic and an empirical perspective. We show that estimates of the common factors based on maximum likelihood are consistent for the size of the cross-section (n) and the sample size (T), going to infinity along any path, and that maximum likelihood is viable for n large. The estimator is robust to misspecification of cross-sectional and time series correlation of the idiosyncratic components. In practice, the estimator can be easily implemented using the Kalman smoother and the EM algorithm as in traditional factor analysis.

A Quasi Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models / Catherine, Doz; Giannone, Domenico; Lucrezia, Reichlin. - In: THE REVIEW OF ECONOMICS AND STATISTICS. - ISSN 0034-6535. - 94:4(2012), pp. 1014-1024. [10.1162/REST_a_00225]

A Quasi Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models

GIANNONE, DOMENICO;
2012

Abstract

Is maximum likelihood suitable for factor models in large cross-sections of time series? We answer this question from both an asymptotic and an empirical perspective. We show that estimates of the common factors based on maximum likelihood are consistent for the size of the cross-section (n) and the sample size (T), going to infinity along any path, and that maximum likelihood is viable for n large. The estimator is robust to misspecification of cross-sectional and time series correlation of the idiosyncratic components. In practice, the estimator can be easily implemented using the Kalman smoother and the EM algorithm as in traditional factor analysis.
A Quasi Maximum Likelihood Approach for Large, Approximate Dynamic Factor Models / Catherine, Doz; Giannone, Domenico; Lucrezia, Reichlin. - In: THE REVIEW OF ECONOMICS AND STATISTICS. - ISSN 0034-6535. - 94:4(2012), pp. 1014-1024. [10.1162/REST_a_00225]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/93994
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