Empirical Bayes Methods for Dynamic Factor Models

Tinbergen Institute Discussion Paper 14-061/III

45 Pages Posted: 25 May 2014

See all articles by Siem Jan Koopman

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Geert Mesters

Vrije Universiteit Amsterdam, School of Business and Economics

Date Written: May 22, 2014

Abstract

We consider the dynamic factor model where the loading matrix, the dynamic factors and the disturbances are treated as latent stochastic processes. We present empirical Bayes methods that enable the efficient shrinkage-based estimation of the loadings and the factors. We show that our estimates have lower quadratic loss compared to the standard maximum likelihood estimates. We investigate the methods in a Monte Carlo study where we document the finite sample properties. Finally, we present and discuss the results of an empirical study concerning the forecasting of U.S. macroeconomic time series using our empirical Bayes methods.

Keywords: Importance sampling, Kalman filtering, Likelihood-based analysis, Posterior modes, Rao-Blackwellization, Shrinkage

JEL Classification: C32, C43

Suggested Citation

Koopman, Siem Jan and Mesters, Geert, Empirical Bayes Methods for Dynamic Factor Models (May 22, 2014). Tinbergen Institute Discussion Paper 14-061/III, Available at SSRN: https://ssrn.com/abstract=2441183 or http://dx.doi.org/10.2139/ssrn.2441183

Siem Jan Koopman (Contact Author)

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Geert Mesters

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
55
Abstract Views
528
rank
459,493
PlumX Metrics