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Principal Components Estimation and Identification of the Factors

Bai, Jushan; Ng, Serena

It is known that the principal component estimates of the factors and the loadings are rotations of the underlying latent factors and loadings. We study conditions under which the latent factors can be estimated asymptotically without rotation. We derive the limiting distributions for the factor estimates when N and T are large and make precise how identification of the factors affects inference based on factor augmented regressions. We also consider factor models with additive individual and time effects.

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More About This Work

Academic Units
Economics
Publisher
Department of Economics, Columbia University
Series
Department of Economics Discussion Papers, 1112-02
Published Here
September 1, 2011
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