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Econometrica Vol. 81 No. 3 2013

Eigenvalue Ratio Test for the Number of Factors

Seung C. Ahn1,2; Alex R. Horenstein3,4

1 Sogang University · 2 Arizona State University · 3 Instituto Tecnológico Autónomo de México · 4 Potato Research Institute

Abstract

This paper proposes two new estimators for determining the number of factors (r) in static approximate factor models. We exploit the well-known fact that the r largest eigenvalues of the variance matrix of N response variables grow unboundedly as N increases, while the other eigenvalues remain bounded. The new estimators are obtained simply by maximizing the ratio of two adjacent eigenvalues. Our simulation results provide promising evidence for the two estimators.

DOI
10.3982/ecta8968
Volume
81
Issue
3
Pages
1203-1227
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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