A Spectral EM Algorithm for Dynamic Factor Models

62 Pages Posted: 1 Oct 2016

See all articles by Gabriele Fiorentini

Gabriele Fiorentini

Universita di Firenze - Dipartimento di Statistica

Alessandro Galesi

Banco de España

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI); Financial Markets Group; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: September 30, 2016

Abstract

We make two complementary contributions to efficiently estimate dynamic factor models: a frequency domain EM algorithm and a swift iterated indirect inference procedure for ARMA models with no asymptotic efficiency loss for any finite number of iterations. Although our procedures can estimate such models with many series without good initial values, near the optimum we recommend switching to a gradient method that analytically computes spectral scores using the EM principle. We successfully employ our methods to construct an index that captures the common movements of US sectoral employment growth rates, which we compare to the indices obtained by semi-parametric methods.

Keywords: indirect inference, Kalman filter, sectoral employment, spectral maximum likelihood, Wiener-Kolmogorov filter

JEL Classification: C32, C38, C51

Suggested Citation

Fiorentini, Gabriele and Galesi, Alessandro and Sentana, Enrique, A Spectral EM Algorithm for Dynamic Factor Models (September 30, 2016). Banco de Espana Working Paper No. 1619. Available at SSRN: https://ssrn.com/abstract=2845794 or http://dx.doi.org/10.2139/ssrn.2845794

Gabriele Fiorentini (Contact Author)

Universita di Firenze - Dipartimento di Statistica ( email )

Viale Morgagni, 59
50134 Firenze
Italy
+39 055 4237 274 (Phone)
+39 055 4223 560 (Fax)

Alessandro Galesi

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Enrique Sentana

Centro de Estudios Monetarios y Financieros (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~sentana/

Financial Markets Group

Houghton Street
London School of Economics & Political Science (LSE)
London WC2A 2AE
United Kingdom
+44 20 7955 7002 (Phone)
+44 20 7852 3580 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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