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Parametric Estimation of Long Memory in Factor Models

Author

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  • Yunus Emre Ergemen

    (Aarhus University, Department of Economics and Business Economics, and CREATES)

Abstract
A dynamic factor model is proposed in that factor dynamics are driven by stochastic time trends describing arbitrary persistence levels. The proposed model is essentially a long memory factor model, which nests standard I(0) and I(1) behavior smoothly in common factors. In the estimation, principal components analysis (PCA) and conditional sum of squares (CSS) estimations are employed. For the dynamic model parameters, centered normal asymptotics are established at the usual parametric rates, and their small-sample properties are explored via Monte-Carlo experiments. The method is then applied to a panel of U.S. industry realized volatilities. JEL classifcation: C12, C13, C33 Key words: Factor models, long memory, conditional sum of squares, principal components analysis, realized volatility

Suggested Citation

  • Yunus Emre Ergemen, 2022. "Parametric Estimation of Long Memory in Factor Models," CREATES Research Papers 2022-10, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2022-10
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    File URL: https://repec.econ.au.dk/repec/creates/rp/22/rp22_10.pdf
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    factor models; long memory; conditional sum of squares; principal components analysis; realized volatility;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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