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Eigenvalue Ratio Test for the Number of Factors
Journal article   Peer reviewed

Eigenvalue Ratio Test for the Number of Factors

Seung C Ahn and Alex R Horenstein
Econometrica, Vol.81(3), pp.1203-1227
2013-05

Abstract

number of factors eigenvalues Approximate factor models
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.

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6 Social Sciences
6.10 Economics
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Economics
Mathematics, Interdisciplinary Applications
Social Sciences, Mathematical Methods
Statistics & Probability
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Economics & Business

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