Department of Economics and Business Economics

A Dynamic Multi-Level Factor Model with Long-Range Dependence

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A dynamic multi-level factor model with stationary or nonstationary global and regional factors is proposed. In the model, persistence in global and regional common factors as well as innovations allows for the study of fractional cointegrating relationships. Estimation of global and regional common factors is performed in two steps employing canonical correlation analysis and a sequential least-squares algorithm. Selection of the number of global and regional factors is discussed. The small sample properties of our methodology are investigated by some Monte Carlo simulations. The method is then applied to the Nord Pool power market for the analysis of price comovements among different regions within the power grid. We find that the global factor can be interpreted as the system price of the power grid as well as a fractional cointegration relationship between prices and the global factor.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages40
Publication statusPublished - 15 Aug 2016
SeriesCREATES Research Papers

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