Eigenvalue ratio test for the number of factors

Seung Ahn, Alex R. Horenstein

Research output: Contribution to journalArticle

157 Scopus citations

Abstract

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 languageEnglish (US)
Pages (from-to)1203-1227
Number of pages25
JournalEconometrica
Volume81
Issue number3
DOIs
StatePublished - May 1 2013

Keywords

  • Approximate factor models
  • Eigenvalues
  • Number of factors

ASJC Scopus subject areas

  • Economics and Econometrics

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