Work

Consistent estimation of time-varying loadings in high-dimensional factor models

Year: 2018

Type: article

Abstract: In this paper, we develop a two-step maximum likelihood estimator of time-varying loadings in high-dimensional factor models. We specify the loadings to evolve as stationary vector autoregressions (VAR) and show that consistent estimates of the loadings parameters can be obtained. In the first step, principal components are extracted from the data to form factor estimates. In the second step, the parameters of the loadings VARs are estimated as a set of linear regression models with time-varying coefficients. We document the finite-sample properties of the maximum likelihood estimator through an extensive simulation study and illustrate the empirical relevance of the time-varying loadings structure using a large quarterly dataset for the US economy.

Source: Journal of Econometrics

DOI: 10.1016/j.jeconom.2018.09.020

Authors: Jakob Guldbæk Mikkelsen, Eric Hillebrand, Giovanni Urga

Institutions: Danmarks Nationalbank, Aarhus University, University of Bergamo

Language: English

Topic: Financial Risk and Volatility Modeling

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green