Estimation of Non-Gaussian Factors Using Higher-order Multi-cumulants in Weak Factor Models

37 Pages Posted: 12 Feb 2021 Last revised: 31 Jul 2023

See all articles by Wanbo Lu

Wanbo Lu

Southwestern University of Finance and Economics (SWUFE)

Guanglin Huang

Southwestern University of Finance and Economics (SWUFE); Vrije Universiteit Brussel (VUB)

Kris Boudt

Ghent University; Vrije Universiteit Brussel; Vrije Universiteit Amsterdam

Date Written: July 31, 2023

Abstract

We estimate the latent factors in high-dimensional non-Gaussian panel data using the eigenvalue decomposition of the product between the higher-order multi-cumulant and its transpose. The proposed Higher order multi-cumulant Factor Analysis (HFA) approach comprises an eigenvalue ratio test to select the number of non-Gaussian factors and uses the eigenvector to estimate the factor loadings. Unlike covariance-based approaches, HFA remains reliable for estimating the non-Gaussian factors in weak factor models with Gaussian error terms. Simulation results confirm that HFA estimators improve the accuracy of factor selection and estimation compared to covariance-based approaches. We illustrate the use of HFA to detect and estimate the factors for the FRED-MD data set and use them to forecast the monthly S&P 500 equity premium.

Keywords: Higher-order multi-cumulants; High-dimensional factor models; Weak factors; Consistency; Singular values

JEL Classification: G11, G12, G15

Suggested Citation

Lu, Wanbo and Huang, Guanglin and Boudt, Kris, Estimation of Non-Gaussian Factors Using Higher-order Multi-cumulants in Weak Factor Models (July 31, 2023). Available at SSRN: https://ssrn.com/abstract=3599632 or http://dx.doi.org/10.2139/ssrn.3599632

Wanbo Lu

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Guanglin Huang (Contact Author)

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Vrije Universiteit Brussel (VUB) ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Kris Boudt

Ghent University ( email )

Sint-Pietersplein 5
Gent, 9000
Belgium

Vrije Universiteit Brussel ( email )

Pleinlaan 2
http://www.vub.ac.be/
Brussels, 1050
Belgium

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

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