A criterion for the number of factors [IN PRESS]

Ard H. J. den Reijer, Jan Jacobs, Pieter W. Otter

    Research output: Contribution to journalArticle

    Abstract

    This note proposes a new criterion for the determination of the number of factors in an approximate static factor model. The criterion is strongly associated with the scree test and compares the differences between consecutive eigenvalues to a threshold. The size of the threshold is derived from a hyperbola and depends only on the sample size and the number of factors k. Monte Carlo simulations compare its properties with well-established estimators from the literature. Our criterion shows similar results as the standard implementations of these estimators, but is not prone to a lack of robustness against a too large a priori determined maximum number of factors kmax.
    Original languageEnglish
    Pages (from-to)-
    JournalCommunications in Statistics: Theory and Methods
    DOIs
    Publication statusPublished - 2020

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