Analyzing International Business and Financial Cycles using Multi-Level Factor Models: A Comparison of Alternative Approaches
ISBN: 978-1-78560-353-2, eISBN: 978-1-78560-352-5
Publication date: 6 January 2016
Abstract
This paper compares alternative estimation procedures for multi-level factor models which imply blocks of zero restrictions on the associated matrix of factor loadings. We suggest a sequential least squares algorithm for minimizing the total sum of squared residuals and a two-step approach based on canonical correlations that are much simpler and faster than Bayesian approaches previously employed in the literature. An additional advantage is that our approaches can be used to estimate more complex multi-level factor structures where the number of levels is greater than two. Monte Carlo simulations suggest that the estimators perform well in typical sample sizes encountered in the factor analysis of macroeconomic data sets. We apply the methodologies to study international comovements of business and financial cycles.
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Acknowledgements
Acknowledgements
The opinions expressed in this paper are those of the authors and do not necessarily reflect the views of the Deutsche Bundesbank. This paper has been presented at seminars at the universities Duisburg-Essen, Padova and Tübingen and the Bundesbank, a joint Norges Bank-Bundesbank modelling workshop (Oslo), the 4th International Carlo Giannini conference (Pavia) and a factor modelling workshop (Frankfurt). We thank Knut Are Aastveit, Giovanni Caggiano, Carolina Castagnetti, Efrem Castelnuovo, Christian Schumacher and two referees for helpful comments and suggestions.
Citation
Jörg, B. and Sandra, E. (2016), "Analyzing International Business and Financial Cycles using Multi-Level Factor Models: A Comparison of Alternative Approaches", Dynamic Factor Models (Advances in Econometrics, Vol. 35), Emerald Group Publishing Limited, Leeds, pp. 177-214. https://doi.org/10.1108/S0731-905320150000035005
Publisher
:Emerald Group Publishing Limited
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