Ignoring cross-correlated idiosyncratic components when extracting factors in dynamic factor models

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dc.contributor.author Fresoli, Diego Eduardo
dc.contributor.author Poncela Blanco, Maria Pilar
dc.contributor.author Ruiz Ortega, Esther
dc.contributor.editor Universidad Carlos III de Madrid. Departamento de Estadística
dc.date.accessioned 2023-01-10T20:53:07Z
dc.date.available 2023-01-10T20:53:07Z
dc.date.issued 2022-12-12
dc.identifier.issn 2387-0303
dc.identifier.uri http://hdl.handle.net/10016/36251
dc.description.abstract In economics, Principal Components, its generalized version that takes into account heteroscedasticity, and Kalman filter and smoothing procedures are among the most popular procedures for factor extraction in the context of Dynamic Factor Models. This paper analyses the consequences on point and interval factor estimation of using these procedures when the idiosyncratic components are wrongly assumed to be cross-sectionally uncorrelated. We show that not taking into account the presence of cross-sectional dependence increases the uncertainty of point estimates of the factors. Furthermore, the Mean Square Errors computed using the usual expressions based on asymptotic approximations, are underestimated and may lead to prediction intervals with extremely low coverages.
dc.language.iso eng
dc.relation.ispartofseries Working paper Statistics and Econometrics
dc.relation.ispartofseries 22-11
dc.rights Atribución-NoComercial-SinDerivadas 3.0 España
dc.rights.uri http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.other EM Algorithm
dc.subject.other Kalman Filter
dc.subject.other Principal Components
dc.subject.other State-Space Model
dc.title Ignoring cross-correlated idiosyncratic components when extracting factors in dynamic factor models
dc.type workingPaper
dc.subject.jel C32
dc.subject.jel C38
dc.subject.jel C55
dc.subject.eciencia Estadística
dc.relation.projectID Gobierno de España. PID2019-108079GB-C21
dc.relation.projectID Gobierno de España. PID2019-108079GB-C22
dc.identifier.uxxi DT/0000002037
dc.contributor.funder Ministerio de Ciencia y Tecnología (España)
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