Determining the Number of Factors in Approximate Factor Models

EconometricaVolume 70, Issue 1 p. 191-221 Determining the Number of Factors in Approximate Factor Models Jushan Bai, Jushan Bai Dept. of Economics, Boston College, [email protected]Search for more papers by this authorSerena Ng, Serena Ng Dept. of Economics, Johns Hopkins University, Baltimore, [email protected]Search for more papers by this author Jushan Bai, Jushan Bai Dept. of Economics, Boston College, [email protected]Search for more papers by this authorSerena Ng, Serena Ng Dept. of Economics, Johns Hopkins University, Baltimore, [email protected]Search for more papers by this author First published: 12 December 2003 https://doi.org/10.1111/1468-0262.00273Citations: 2,338AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onEmailFacebookTwitterLinkedInRedditWechat Abstract In this paper we develop some econometric theory for factor models of large dimensions. The focus is the determination of the number of factors (r), which is an unresolved issue in the rapidly growing literature on multifactor models. We first establish the convergence rate for the factor estimates that will allow for consistent estimation of r. We then propose some panel criteria and show that the number of factors can be consistently estimated using the criteria. The theory is developed under the framework of large cross-sections (N) and large time dimensions (T). No restriction is imposed on the relation between N and T. Simulations show that the proposed criteria have good finite sample properties in many configurations of the panel data encountered in practice. Citing Literature Volume70, Issue1January 2002Pages 191-221 RelatedInformation