Determining the Number of Factors in Approximate Factor Models-英文文献.pdf

DETERMINING THE NUMBER OF FACTORS IN APPROXIMATE FACTOR MODELS Jushan Bai Serena Ng Department of Economics Boston College Chestnut Hill MA 02467 Januar y31, 2000 Abstract In this paper we develop some statistical theory for factor models of large dimen- sions. The focus is the determination of the number of factors, which is an unresolved issue in the rapidly growing literature on multifactor models. We propose a panel Cp criterion and show that the number of factors can be consistently estimated using the criterion. The theory is developed under the framework of large cross-sections (N ) and large time dimensions (T ). No restriction is imposed on the relation between N and T . Simulations show that the proposed criterion yields almost precise estimates of the number of factors for configurations of the panel data encountered in practice. JEL Classification: C13, C33, C43 1 Introduction The idea that variations in a large number of economic variables can be modelled b ya small number of reference variables is appealing and is used in man yeconomic analysis. In the finance literature, the arbitrage pricing theor y(APT) of Ross (1976) assumes that a small number of factors can be used to explain a large number of asset returns.1 The observed comovements in a large number of macroeconomic time series have likewise generated enor- mous interests in developing ways to account for business cycle dynamics b ya small number of reference variables. In demand analysis, Lewbel (1991) showed that