[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/een/camaaa/2014-43.html
   My bibliography  Save this paper

Analyzing business and financial cycles using multi-level factor models

Author

Listed:
  • Jörg Breitung
  • Sandra Eickmeier
Abstract
This paper compares alternative estimation procedures for multi-level factor models which imply blocks of zero restrictions on the associated matrix of factor loadings. We suggest a sequential least squares algorithm for minimizing the total sum of squared residuals and a two-step approach based on canonical correlations that are much simpler and faster than Bayesian approaches previously employed in the literature. Monte Carlo simulations suggest that the estimators perform well in typical sample sizes encountered in the factor analysis of macroeconomic data sets. We apply the methodologies to study international co-movements of business and financial cycles as well as asymmetries over the business cycle in the US.

Suggested Citation

  • Jörg Breitung & Sandra Eickmeier, 2014. "Analyzing business and financial cycles using multi-level factor models," CAMA Working Papers 2014-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2014-43
    as

    Download full text from publisher

    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-05/43_2014_breitung_eickmeier.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kaufmann, Sylvia & Schumacher, Christian, 2012. "Finding relevant variables in sparse Bayesian factor models: Economic applications and simulation results," Discussion Papers 29/2012, Deutsche Bundesbank.
    2. Moen, Jon R. & Tallman, Ellis W., 2000. "Clearinghouse Membership and Deposit Contraction during the Panic of 1907," The Journal of Economic History, Cambridge University Press, vol. 60(1), pages 145-163, March.
    3. Nason, James M. & Tallman, Ellis W., 2015. "Business Cycles And Financial Crises: The Roles Of Credit Supply And Demand Shocks," Macroeconomic Dynamics, Cambridge University Press, vol. 19(4), pages 836-882, June.
    4. Breitung, Jörg & Tenhofen, Jörn, 2011. "GLS Estimation of Dynamic Factor Models," Journal of the American Statistical Association, American Statistical Association, vol. 106(495), pages 1150-1166.
    5. Hideaki Hirata & M. Ayhan Kose & Chris Otrok, "undated". "Regionalization vs. Globalization," Working Paper 164456, Harvard University OpenScholar.
    6. Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
    7. Marcelle Chauvet & James D. Hamilton, 2006. "Dating Business Cycle Turning Points," Contributions to Economic Analysis, in: Nonlinear Time Series Analysis of Business Cycles, pages 1-54, Emerald Group Publishing Limited.
    8. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-248, April.
    9. Claessens, Stijn & Kose, M. Ayhan & Terrones, Marco E., 2012. "How do business and financial cycles interact?," Journal of International Economics, Elsevier, vol. 87(1), pages 178-190.
    10. Peersman, Gert & Smets, Frank, 2001. "Are the effects of monetary policy in the euro area greater in recessions than in booms?," Working Paper Series 52, European Central Bank.
    11. Sandra Eickmeier & Christina Ziegler, 2008. "How successful are dynamic factor models at forecasting output and inflation? A meta-analytic approach," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(3), pages 237-265.
    12. Ball, Laurence & Mankiw, N Gregory, 1994. "Asymmetric Price Adjustment and Economic Fluctuations," Economic Journal, Royal Economic Society, vol. 104(423), pages 247-261, March.
    13. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    14. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    15. Jon Faust & Simon Gilchrist & Jonathan H. Wright & Egon Zakrajšsek, 2013. "Credit Spreads as Predictors of Real-Time Economic Activity: A Bayesian Model-Averaging Approach," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1501-1519, December.
    16. Christophe André, 2010. "A Bird's Eye View of OECD Housing Markets," OECD Economics Department Working Papers 746, OECD Publishing.
    17. Guenter W. Beck & Kirstin Hubrich & Massimiliano Marcellino, 2016. "On the Importance of Sectoral and Regional Shocks for Price‐Setting," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1234-1253, November.
    18. Mahadeva,Lavan & Sinclair,Peter (ed.), 2002. "Monetary Transmission in Diverse Economies," Cambridge Books, Cambridge University Press, number 9780521813464, September.
    19. M. Ayhan Kose & Eswar S. Prasad & Marco E. Terrones, 2003. "How Does Globalization Affect the Synchronization of Business Cycles?," American Economic Review, American Economic Association, vol. 93(2), pages 57-62, May.
    20. Kirstin Hubrich & Guenter Beck & Massimiliano Marcellino, 2000. "Regional Inflation Dynamics within and across Euro Area Countries and a Comparison with the US," Regional and Urban Modeling 283600037, EcoMod.
    21. Weidenmier, Marc, 2010. "This Time is Different: Eight Centuries of Financial Folly. By Carmen Reinhart and Kenneth Rogoff. Princeton, NJ: Princeton University Press, 2009. $35.00," The Journal of Economic History, Cambridge University Press, vol. 70(3), pages 766-768, September.
    22. Eickmeier, Sandra, 2007. "Business cycle transmission from the US to Germany--A structural factor approach," European Economic Review, Elsevier, vol. 51(3), pages 521-551, April.
    23. Negro, Marco Del & Schorfheide, Frank, 2013. "DSGE Model-Based Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 57-140, Elsevier.
    24. M. Ayhan Kose & Christopher Otrok & Eswar Prasad, 2012. "Global Business Cycles: Convergence Or Decoupling?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 511-538, May.
    25. John B. Taylor, 2012. "The Great Deviation," Book Chapters, in: Evan F. Koenig & Robert Leeson & George A. Kahn (ed.), The Taylor Rule and the Transformation of Monetary Policy, chapter 7, Hoover Institution, Stanford University.
    26. Lopez-Salido, David & Nelson, Edward, 2010. "Postwar Financial Crises and Economic Recoveries in the United States," MPRA Paper 98502, University Library of Munich, Germany.
    27. Antonello D’ Agostino & Domenico Giannone, 2012. "Comparing Alternative Predictors Based on Large‐Panel Factor Models," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(2), pages 306-326, April.
    28. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
    29. Gregory, Allan W. & Head, Allen C., 1999. "Common and country-specific fluctuations in productivity, investment, and the current account," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 423-451, December.
    30. Eickmeier, Sandra & Hofmann, Boris, 2013. "Monetary Policy, Housing Booms, And Financial (Im)Balances," Macroeconomic Dynamics, Cambridge University Press, vol. 17(4), pages 830-860, June.
    31. Hallin, Marc & Liska, Roman, 2011. "Dynamic factors in the presence of blocks," Journal of Econometrics, Elsevier, vol. 163(1), pages 29-41, July.
    32. Liebermann, Joelle, 2012. "Real-time forecasting in a data-rich environment," MPRA Paper 39452, University Library of Munich, Germany.
    33. Knut Are Aastveit & Hilde C. Bjørnland & Leif Anders Thorsrud, 2016. "The World Is Not Enough! Small Open Economies and Regional Dependence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 118(1), pages 168-195, January.
    34. Boivin, Jean & Ng, Serena, 2006. "Are more data always better for factor analysis?," Journal of Econometrics, Elsevier, vol. 132(1), pages 169-194, May.
    35. Jörg Breitung & Uta Pigorsch, 2013. "A Canonical Correlation Approach for Selecting the Number of Dynamic Factors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(1), pages 23-36, February.
    36. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
    37. Boris Hofmann & Bilyana Bogdanova, 2012. "Taylor rules and monetary policy: a global "Great Deviation"?," BIS Quarterly Review, Bank for International Settlements, September.
    38. Leif Anders Thorsrud, 2013. "Global and regional business cycles. Shocks and propagations," Working Papers No 3/2013, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    39. Goodwin, Thomas H, 1993. "Business-Cycle Analysis with a Markov-Switching Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 331-339, July.
    40. Stock J.H. & Watson M.W., 2002. "Forecasting Using Principal Components From a Large Number of Predictors," Journal of the American Statistical Association, American Statistical Association, vol. 97, pages 1167-1179, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Schüler, Yves Stephan & Hiebert, Paul P. & Peltonen, Tuomas A., 2015. "Characterising the financial cycle: A multivariate and time-varying approach," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112985, Verein für Socialpolitik / German Economic Association.
    2. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    3. repec:hum:wpaper:sfb649dp2015-024 is not listed on IDEAS
    4. Gabriele Fiorentini & Alessandro Galesi & Enrique Sentana, 2016. "Fast ML Estimation of Dynamic Bifactor Models: An Application to European Inflation," Advances in Econometrics, in: Dynamic Factor Models, volume 35, pages 215-282, Emerald Group Publishing Limited.
    5. Strohsal, Till & Proaño, Christian R. & Wolters, Jürgen, 2019. "Characterizing the financial cycle: Evidence from a frequency domain analysis," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 568-591.
    6. Alina Bobasu & Lucia Quaglietti & Martino Ricci, 2024. "Tracking Global Economic Uncertainty: Implications for the Euro Area," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(2), pages 820-857, June.
    7. Antoine A. Djogbenou, 2020. "Comovements in the real activity of developed and emerging economies: A test of global versus specific international factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(3), pages 344-370, April.
    8. Schüler, Yves S. & Hiebert, Paul P. & Peltonen, Tuomas A., 2020. "Financial cycles: Characterisation and real-time measurement," Journal of International Money and Finance, Elsevier, vol. 100(C).
    9. Strohsal, Till & Proaño Acosta, Christian & Wolters, Jürgen, 2015. "How do financial cycles interact? Evidence from the US and the UK," SFB 649 Discussion Papers 2015-024, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    10. Hartwig, Benny & Meinerding, Christoph & Schüler, Yves S., 2021. "Identifying indicators of systemic risk," Journal of International Economics, Elsevier, vol. 132(C).
    11. Christian Menden & Christian R. Proaño, 2017. "Dissecting the financial cycle with dynamic factor models," Quantitative Finance, Taylor & Francis Journals, vol. 17(12), pages 1965-1994, December.
    12. Bjarni G. Einarsson & Kristófer Gunnlaugsson & Thorvardur Tjörvi Ólafsson & Thórarinn G. Pétursson, 2016. "The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles," Economics wp72, Department of Economics, Central bank of Iceland.
    13. Laura E. Jackson & M. Ayhan Kose & Christopher Otrok & Michael T. Owyang, 2016. "Specification and Estimation of Bayesian Dynamic Factor Models: A Monte Carlo Analysis with an Application to Global House Price Comovement," Advances in Econometrics, in: Dynamic Factor Models, volume 35, pages 361-400, Emerald Group Publishing Limited.
    14. Till Strohsal & Christian R. Proaño & Jürgen Wolters, 2019. "Assessing the cross-country interaction of financial cycles: evidence from a multivariate spectral analysis of the USA and the UK," Empirical Economics, Springer, vol. 57(2), pages 385-398, August.
    15. repec:hum:wpaper:sfb649dp2015-021 is not listed on IDEAS
    16. Gerhard Rünstler & Marente Vlekke, 2018. "Business, housing, and credit cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(2), pages 212-226, March.
    17. Breitung, Jörg & Eickmeier, Sandra, 2015. "Analyzing business cycle asymmetries in a multi-level factor model," Economics Letters, Elsevier, vol. 127(C), pages 31-34.
    18. Hakan Kara & Pinar Ozlu & Deren Unalmis, 2015. "Turkiye icin Finansal Kosullar Endeksi," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 15(3), pages 41-73.
    19. Schüler, Yves S. & Peltonen, Tuomas A. & Hiebert, Paul, 2017. "Coherent financial cycles for G-7 countries: Why extending credit can be an asset," ESRB Working Paper Series 43, European Systemic Risk Board.
    20. Bonciani, Dario & Ricci, Martino, 2020. "The international effects of global financial uncertainty shocks," Journal of International Money and Finance, Elsevier, vol. 109(C).
    21. Li, Xiao-Lin & Yan, Jing & Wei, Xiaohui, 2021. "Dynamic connectedness among monetary policy cycle, financial cycle and business cycle in China," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 640-652.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Breitung, Jörg & Eickmeier, Sandra, 2015. "Analyzing business cycle asymmetries in a multi-level factor model," Economics Letters, Elsevier, vol. 127(C), pages 31-34.
    2. Helmut Lütkepohl, 2014. "Structural Vector Autoregressive Analysis in a Data Rich Environment: A Survey," Discussion Papers of DIW Berlin 1351, DIW Berlin, German Institute for Economic Research.
    3. Esteban Prieto & Sandra Eickmeier & Massimiliano Marcellino, 2016. "Time Variation in Macro‐Financial Linkages," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(7), pages 1215-1233, November.
    4. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    5. Karim Barhoumi & Olivier Darné & Laurent Ferrara, 2014. "Dynamic factor models: A review of the literature," OECD Journal: Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2013(2), pages 73-107.
    6. Marcellino, Massimiliano & Eickmeier, Sandra & Lemke, Wolfgang, 2011. "Classical time-varying FAVAR models - Estimation, forecasting and structural analysis," CEPR Discussion Papers 8321, C.E.P.R. Discussion Papers.
    7. repec:hum:wpaper:sfb649dp2014-004 is not listed on IDEAS
    8. Poncela, Pilar & Ruiz, Esther & Miranda, Karen, 2021. "Factor extraction using Kalman filter and smoothing: This is not just another survey," International Journal of Forecasting, Elsevier, vol. 37(4), pages 1399-1425.
    9. Choi, Sung Hoon & Kim, Donggyu, 2023. "Large volatility matrix analysis using global and national factor models," Journal of Econometrics, Elsevier, vol. 235(2), pages 1917-1933.
    10. Luciani, Matteo, 2014. "Forecasting with approximate dynamic factor models: The role of non-pervasive shocks," International Journal of Forecasting, Elsevier, vol. 30(1), pages 20-29.
    11. Jörg Breitung & In Choi, 2013. "Factor models," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 11, pages 249-265, Edward Elgar Publishing.
      • In Choi & Jorg Breitung, 2011. "Factor models," Working Papers 1121, Nam Duck-Woo Economic Research Institute, Sogang University (Former Research Institute for Market Economy), revised Dec 2011.
    12. Choi, In & Lin, Rui & Shin, Yongcheol, 2023. "Canonical correlation-based model selection for the multilevel factors," Journal of Econometrics, Elsevier, vol. 233(1), pages 22-44.
    13. Simona Delle Chiaie & Laurent Ferrara & Domenico Giannone, 2022. "Common factors of commodity prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(3), pages 461-476, April.
    14. Hideaki Hirata & M. Ayhan Kose & Christopher Otrok & Marco E Terrones, 2013. "Global House Price Fluctuations: Synchronization and Determinants," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 119-166.
    15. Yunus Emre Ergemen & Carlos Vladimir Rodríguez-Caballero, 2016. "A Dynamic Multi-Level Factor Model with Long-Range Dependence," CREATES Research Papers 2016-23, Department of Economics and Business Economics, Aarhus University.
    16. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," Working Papers 2019-4, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    17. Ergemen, Yunus Emre & Rodríguez-Caballero, C. Vladimir, 2023. "Estimation of a dynamic multi-level factor model with possible long-range dependence," International Journal of Forecasting, Elsevier, vol. 39(1), pages 405-430.
    18. Serena Ng & Jonathan H. Wright, 2013. "Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling," Journal of Economic Literature, American Economic Association, vol. 51(4), pages 1120-1154, December.
    19. Claudia M. Buch & Sandra Eickmeier & Esteban Prieto, 2014. "Macroeconomic Factors and Microlevel Bank Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(4), pages 715-751, June.
    20. Bai, Jushan & Wang, Peng, 2012. "Identification and estimation of dynamic factor models," MPRA Paper 38434, University Library of Munich, Germany.
    21. Eickmeier, Sandra & Ng, Tim, 2011. "Forecasting national activity using lots of international predictors: An application to New Zealand," International Journal of Forecasting, Elsevier, vol. 27(2), pages 496-511, April.

    More about this item

    Keywords

    Factor models; canonical correlations; international business cycles; financial cycles; business cycle asymmetries;
    All these keywords.

    JEL classification:

    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:een:camaaa:2014-43. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Cama Admin (email available below). General contact details of provider: https://edirc.repec.org/data/asanuau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.