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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society
Standardization and Estimation of the Number of Factors for Panel Data
Vol.23, No.2, June 2012, 79–88
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Ryan Greenaway-McGrevy
(Bureau of Economic Analysis, Washington, D.C., U.S.A.)
Chirok Han
(Korea University)
Donggyu Sul
(University of Texas at Dallas)
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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.
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Keywords
Factor Model, Selection Criteria, Principal Components Estimator, Bai-Ng Criteria, Standarization, Panel Data |
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C33 |
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