A two-step estimator for large approximate dynamic factor models based on Kalman filtering ∗

@inproceedings{Doz2009ATE,
  title={A two-step estimator for large approximate dynamic factor models based on Kalman filtering ∗},
  author={Catherine Doz and Domenico Giannone},
  year={2009}
}
This paper shows consistency of a two step estimation of the factors in a dynamic approximate factor model when the panel of time series is large (n large). In the first step, the parameters of the model are first estimated from an OLS on principal components. In the second step, the factors are estimated via the Kalman smoother. This projection allows to consider dynamics in the factors and in the idiosyncratic component, and heteroscedasticity in the idiosyncratic variance. The analysis… CONTINUE READING
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