A Comparison of the Finite Sample Properties of Selection Rules of Factor Numbers in Large Datasets

Liang Guo-Fitoussi (1) , Olivier Darné (2)

1 RITM - Réseaux Innovation Territoires et Mondialisation
2 LEMNA - Laboratoire d'économie et de management de Nantes Atlantique

In this paper, we compare the properties of the main criteria proposed for selecting the number of factors in dynamic factor model in a small sample. Both static and dynamic factor numbers' selection rules are studied. Simulations show that the GR ratio proposed by Ahn and Horenstein (2013) and the criterion proposed by Onatski (2010) outperform the others. Furthermore, the two criteria can select accurately the number of static factors in a dynamic factors design. Also, the criteria proposed by Hallin and Liska (2007) and Breitung and Pigorsch (2009) correctly select the number of dynamic factors in most cases. However, empirical applications show most criteria select only one factor in presence of one strong factor.

Mots clés: Dynamic factor model; factor numbers; small sample properties

Domaines: Economies et finances; Gestion et management

Liang Guo-Fitoussi, Olivier Darné. A Comparison of the Finite Sample Properties of Selection Rules of Factor Numbers in Large Datasets. 2014. ⟨hal-00962247⟩