NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Shrinkage Estimation of High-Dimensional Factor Models with Structural Instabilities

Xu Cheng, Zhipeng Liao, Frank Schorfheide

NBER Working Paper No. 19792
Issued in January 2014
NBER Program(s):   EFG   ME

In high-dimensional factor models, both the factor loadings and the number of factors may change over time. This paper proposes a shrinkage estimator that detects and disentangles these instabilities. The new method simultaneously and consistently estimates the number of pre- and post-break factors, which liberates researchers from sequential testing and achieves uniform control of the family-wise model selection errors over an increasing number of variables. The shrinkage estimator only requires the calculation of principal components and the solution of a convex optimization problem, which makes its computation efficient and accurate. The finite sample performance of the new method is investigated in Monte Carlo simulations. In an empirical application, we study the change in factor loadings and emergence of new factors during the Great Recession.

download in pdf format
   (497 K)

email paper

Supplementary materials for this paper:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19792

Published: Xu Cheng & Zhipeng Liao & Frank Schorfheide, 2016. "Shrinkage Estimation of High-Dimensional Factor Models with Structural Instabilities," Review of Economic Studies, Oxford University Press, vol. 83(4), pages 1511-1543. citation courtesy of

Users who downloaded this paper also downloaded* these:
Stock and Watson w18094 Disentangling the Channels of the 2007-2009 Recession
Bussiere, Cheng, Chinn, and Lisack w19791 For a Few Dollars More: Reserves and Growth in Times of Crises
Schorfheide and Song w19712 Real-Time Forecasting with a Mixed-Frequency VAR
Nakamura, Steinsson, and Liu w19893 Are Chinese Growth and Inflation Too Smooth? Evidence from Engel Curves
Kearney and Levine w19795 Media Influences on Social Outcomes: The Impact of MTV's 16 and Pregnant on Teen Childbearing
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us