A formal statistical test for the number of factors in the approximate factor models

@inproceedings{Onatski2006AFS,
title={A formal statistical test for the number of factors in the approximate factor models},
author={Alexei Onatski},
year={2006}
}

Alexei Onatski

Published 2006

In this paper we study i.i.d. sequences of n 1 vectors Xt; t = 1; :::; T such that, for each t; Xt has an approximate factor structure with correlated Gaussian idiosyncratic terms. We develop a test of the null of r factors vs. the alternative that the number of factors is larger than k but smaller than kmax+1; where kmax is an a priori maximum number of factors. Our test statistic is equal to the ratio of k+1 kmax+1 to kmax+1 kmax+2; where i is the i-th largest eigenvalue of the sample… CONTINUE READING