Determining the Number of Primitive Shocks in Factor Models

  title={Determining the Number of Primitive Shocks in Factor Models},
  author={S. Ng},
A widely held but untested assumption underlying macroeconomic analysis is that the number of shocks driving economic fluctuations, q, is small. In this paper, we associate q with the number of dynamic factors in a large panel of data. We propose a methodology to determine q without having to estimate the dynamic factors. Our analysis is based on the residuals of a VAR in r static factors, where the factors are themselves obtained by applying the method of principal components to a large panel… CONTINUE READING
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