Dynamic Clustering of Multivariate Panel Data

54 Pages Posted: 30 Jul 2021

See all articles by Igor Custodio João

Igor Custodio João

VU University Amsterdam

Andre Lucas

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

Julia Schaumburg

Tinbergen Institute; VU University Amsterdam

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Multiple version iconThere are 2 versions of this paper

Date Written: July 1, 2021

Abstract

We propose a dynamic clustering model for uncovering latent time-varying group structures in multivariate panel data. The model is dynamic in three ways. First, the cluster location and scale matrices are time-varying to track gradual changes in cluster characteristics over time. Second, all units can transition between clusters based on a Hidden Markov model (HMM). Finally, the HMM’s transition matrix can depend on lagged time-varying cluster distances as well as economic covariates. Monte Carlo experiments suggest that the units can be classified reliably in a variety of challenging settings. Incorporating dynamics in the cluster composition proves empirically important in an a study of 299 European banks between 2008Q1 and 2018Q2. We find that approximately 3% of banks transition per quarter on average. Transition probabilities are in part explained by differences in bank profitability, suggesting that low interest rates can lead to long-lasting changes in financial industry structure.

JEL Classification: G21, C33

Suggested Citation

Custodio João, Igor and Lucas, Andre and Schaumburg, Julia and Schaumburg, Julia and Schwaab, Bernd, Dynamic Clustering of Multivariate Panel Data (July 1, 2021). ECB Working Paper No. 2021/2577, Available at SSRN: https://ssrn.com/abstract=3896132 or http://dx.doi.org/10.2139/ssrn.3896132

Igor Custodio João (Contact Author)

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

Andre Lucas

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

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

Julia Schaumburg

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

HOME PAGE: http://juliaschaumburg.com

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands
+31 (0)20 59 82653 (Phone)

HOME PAGE: http://juliaschaumburg.com

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

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