Internet Appendix for State-Varying Factor Models of Large Dimensions

Abstract

The Internet Appendix collects the proofs and additional results that support the main text. The additional theoretical results include a detailed description of special cases and related models and an extension to noisy and misspecified state processes. We also provide an estimator for the number of factors. The additional empirical results consider alternative state processes and discuss the choice of tuning parameters. We also study a portfolio application of our state-varying factors. The extensive simulation section compares the performance relative to alternative latent factor models that allow for time-variation and studies the choice of bandwidth and number of factors with cross-validation arguments. Lastly, we collect the detailed proofs for all the theoretical statements.

Keywords: Factor Analysis, Principal Components, State-Varying, Nonparametric, Kernel- Regression, Large-Dimensional Panel Data, Large N and T

JEL Classification: C14, C38, C55, G12