Panel Data Models with Grouped Factor Structure Under Unknown Group Membership

64 Pages Posted: 1 Jan 2014

See all articles by Tomohiro Ando

Tomohiro Ando

University of Melbourne - Melbourne Business School

Jushan Bai

Columbia University

Date Written: December 1, 2013

Abstract

This paper studies panel data models with unobserved group factor structures. The group membership of each unit and the number of groups are left unspecified. We estimate the model by minimizing the sum of least squared errors with a shrinkage penalty. The regressions coefficients can be homogeneous or group specific. The consistency and asymptotic normality of the estimator are established. We also introduce new Cp-type criteria for selecting the number of groups, the numbers of group-specific common factors and relevant regressors. Monte Carlo results show that the proposed method works well. We apply the method to the study of US mutual fund returns under homogeneous regression coefficients, and the China mainland stock market under group-specific regression coefficients.

Keywords: C33

Suggested Citation

Ando, Tomohiro and Bai, Jushan, Panel Data Models with Grouped Factor Structure Under Unknown Group Membership (December 1, 2013). Available at SSRN: https://ssrn.com/abstract=2373629 or http://dx.doi.org/10.2139/ssrn.2373629

Tomohiro Ando

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

Jushan Bai (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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