Determining the Number of Factors in Approximate Factor Models

Posted: 15 May 2002

See all articles by Jushan Bai

Jushan Bai

New York University (NYU) - Department of Economics

Serena Ng

Columbia Business School - Economics Department

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.

Suggested Citation

Bai, Jushan and Ng, Serena, Determining the Number of Factors in Approximate Factor Models. Econometrica, Vol. 70, pp. 191-221, January 2002. Available at SSRN: https://ssrn.com/abstract=312229

Jushan Bai (Contact Author)

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10003
United States

Serena Ng

Columbia Business School - Economics Department ( email )

420 West 118th Street
New York, NY 10027
United States

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