Estimation of high-dimensional linear factor models with grouped variables

Chris Heaton*, Victor Solo

*Corresponding author for this work

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

We introduce a generalization of the approximate factor model that divides the observable variables into groups, allows for arbitrarily strong cross-correlation between the disturbance terms of variables that belong to the same group, and for weak correlation between the disturbances of variables that belong to different groups. We call this model the Grouped Variable Approximate Factor Model. We establish identification, propose an estimation approach based on instrumental variable conditions that hold in the limit, and prove consistency in a dual limit framework. Monte Carlo simulations are used to investigate the performance of the estimator, and the techniques are applied to an analysis of industrial output in the US.

Original languageEnglish
Pages (from-to)348-367
Number of pages20
JournalJournal of Multivariate Analysis
Volume105
Issue number1
DOIs
Publication statusPublished - Feb 2012

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