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A quasi-maximum likelihood approach for large approximate dynamic factor models

Journal

Review of Economics and Statistics

Subject

Economics

Publishing details

Review of Economics and Statistics 2012 Vol 94:4 p 1014-1024

Authors / Editors

Doz C;Giannone D;Reichlin L

Biographies

Lucrezia Reichlin

Publication Year

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.

Available on ECCH

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