EIGENVALUE RATIO TEST FOR THE NUMBER OF FACTORS

This paper proposes two new estimators for determining the number of factors (r) in static approximate factor models. We exploit the well-known fact that the r largest eigenvalues of the variance matrix of N response variables grow unboundedly as N increases, while the other eigenvalues remain bound...

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Veröffentlicht in:	Econometrica 2013-05, Vol.81 (3), p.1203-1227
Hauptverfasser:	Ahn, Seung C., Horenstein, Alex R.
Format:	Artikel
Sprache:	eng
Schlagworte:	Approximate factor models Approximation Consistent estimators Determinants Econometric factor models Econometric models Economic models Eigenvalues Estimate reliability Estimating techniques Estimation methods Estimators Factor analysis Matrix NOTES AND COMMENTS number of factors Ratio scales Ratio test Simulation Statistical discrepancies Studies Supernova remnants University administration Variance
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Beschreibung
Zusammenfassung:	This paper proposes two new estimators for determining the number of factors (r) in static approximate factor models. We exploit the well-known fact that the r largest eigenvalues of the variance matrix of N response variables grow unboundedly as N increases, while the other eigenvalues remain bounded. The new estimators are obtained simply by maximizing the ratio of two adjacent eigenvalues. Our simulation results provide promising evidence for the two estimators.
ISSN:	0012-9682 1468-0262
DOI:	10.3982/ECTA8968