We build a simple diagnostic criterion for approximate factor structure in large panel datasets. Given observable factors, the criterion checks whether the errors are weakly cross-sectionally correlated or share at least one unobservable common factor (interactive effects). A general version allows to determine the number of omitted common factors also for time-varying structures. The empirical analysis runs on ten thousand US stocks from January 1968 to December 2011. For monthly returns, we select time-invariant specifications with at least four financial factors, and a scaled three-factor specification. For quarterly returns, we cannot select macroeconomic models without the market factor.

Gagliardini, P., Ossola, E., Scaillet, O. (2019). A diagnostic Criterion for Approximate Factor Structure. JOURNAL OF ECONOMETRICS, 212(2), 503-521 [10.1016/j.jeconom.2019.06.001].

A diagnostic Criterion for Approximate Factor Structure

Ossola, E;
2019

Abstract

We build a simple diagnostic criterion for approximate factor structure in large panel datasets. Given observable factors, the criterion checks whether the errors are weakly cross-sectionally correlated or share at least one unobservable common factor (interactive effects). A general version allows to determine the number of omitted common factors also for time-varying structures. The empirical analysis runs on ten thousand US stocks from January 1968 to December 2011. For monthly returns, we select time-invariant specifications with at least four financial factors, and a scaled three-factor specification. For quarterly returns, we cannot select macroeconomic models without the market factor.
Articolo in rivista - Articolo scientifico
Approximate factor model; Asset pricing; Interactive fixed effects; Large panel; Model selection;
English
503
521
19
Gagliardini, P., Ossola, E., Scaillet, O. (2019). A diagnostic Criterion for Approximate Factor Structure. JOURNAL OF ECONOMETRICS, 212(2), 503-521 [10.1016/j.jeconom.2019.06.001].
Gagliardini, P; Ossola, E; Scaillet, O
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/362696
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