Eigenvalue Ratio Test for the Number of Factors

• Autores: Seung C. Ahn, Alex R. Horenstein
• Localización: Econométrica: Journal of the Econometric Society, ISSN 0012-9682, Vol. 81, Nº 3, 2013, págs. 1203-1227
• Idioma: inglés
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• Resumen

  • This paper proposes two new estimators for determining the number of factors (r) in static approximate factor models. We exploit the well-known fact that the r largest eigenvalues of the variance matrix of N response variables grow unboundedly as N increases, while the other eigenvalues remain bounded. The new estimators are obtained simply by maximizing the ratio of two adjacent eigenvalues. Our simulation results provide promising evidence for the two estimators.