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.
|Original language||English (US)|
|Number of pages||25|
|State||Published - May 1 2013|
- Approximate factor models
- Number of factors
ASJC Scopus subject areas
- Economics and Econometrics