Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Standardization and Estimation of the Number of Factors for Panel Data

Vol.23, No.2, June , 79–88



  •   (Bureau of Economic Analysis, Washington, D.C., U.S.A.)

  •   (Korea University)

  •   (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.


Keywords
   Factor Model, Selection Criteria, Principal Components Estimator, Bai-Ng Criteria, Standarization, Panel Data

JEL classification codes
   C33
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