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Estimation and inference for high dimensional factor model with regime switching

Author

Listed:
  • Urga, Giovanni
  • Wang, Fa
Abstract
This paper proposes maximum (quasi)likelihood estimation for high dimensional factor models with regime switching in the loadings. The model parameters are estimated jointly by EM algorithm, which in the current context only requires iteratively calculating regime probabilities and principal components of the weighted sample covariance matrix. When regime dynamics are taken into account, smoothed regime probabilities are calculated using a recursive algorithm. Consistency, convergence rates and limit distributions of the estimated loadings and the estimated factors are established under weak cross-sectional and temporal dependence as well as heteroscedasticity. It is worth noting that due to high dimension, regime switching can be identified consistently right after the switching point with only one observation. Simulation results show good performance of the proposed method. An application to the FRED-MD dataset demonstrates the potential of the proposed method for quick detection of business cycle turning points.

Suggested Citation

  • Urga, Giovanni & Wang, Fa, 2022. "Estimation and inference for high dimensional factor model with regime switching," MPRA Paper 113172, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:113172
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    References listed on IDEAS

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    Cited by:

    1. Matteo Barigozzi & Daniele Massacci, 2022. "Modelling Large Dimensional Datasets with Markov Switching Factor Models," Papers 2210.09828, arXiv.org, revised Dec 2024.

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    More about this item

    Keywords

    Factor model; Regime switching; Maximum likelihood; High dimension; EM algorithm; Turning points;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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