NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Zhipeng Liao

Department of Economics
University of California, Los Angeles
Bunche Hall
Los Angeles, CA 90095

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NBER Working Papers and Publications

January 2014Shrinkage Estimation of High-Dimensional Factor Models with Structural Instabilities
with Xu Cheng, Frank Schorfheide: w19792
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 load...

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

 
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