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)

    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.

    Original languageEnglish
    Pages (from-to)79-88
    Number of pages10
    JournalJournal of Economic Theory and Econometrics
    Volume23
    Issue number2
    Publication statusPublished - 2012 Jun

    Keywords

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

    ASJC Scopus subject areas

    • Economics and Econometrics

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