Consistent estimation of time-varying loadings in high-dimensional factor models

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  • Jakob Guldbæk Mikkelsen, Danmarks Nationalbank
  • ,
  • Eric Hillebrand
  • Giovanni Urga, Cass Business School, Bergamo University

In this paper, we develop a two-step maximum likelihood estimator of time-varying loadings in high-dimensional factor models. We specify the loadings to evolve as stationary vector autoregressions (VAR) and show that consistent estimates of the loadings parameters can be obtained. In the first step, principal components are extracted from the data to form factor estimates. In the second step, the parameters of the loadings VARs are estimated as a set of linear regression models with time-varying coefficients. We document the finite-sample properties of the maximum likelihood estimator through an extensive simulation study and illustrate the empirical relevance of the time-varying loadings structure using a large quarterly dataset for the US economy.

OriginalsprogEngelsk
TidsskriftJournal of Econometrics
Vol/bind208
Nummer2
Sider (fra-til)535-562
ISSN0304-4076
DOI
StatusUdgivet - 2019

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AM hentet fra Elsevier

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