Standardization and estimation of factor numbers for panel data

Ryan Greenaway-McGrevy, Chirok Han, Donggyu Sul

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)


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.

Original languageEnglish
Pages (from-to)79-88
Number of pages10
JournalJournal of Economic Theory and Econometrics
Issue number2
Publication statusPublished - 2012 Jun


  • Bai-Ng criteria
  • Factor model
  • Panel data
  • Principal components estimator
  • Selection criteria
  • Standarization

ASJC Scopus subject areas

  • Economics and Econometrics


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