Article

Dynamic Factor Models

James H. Stock and Mark W. Watson

in The Oxford Handbook of Economic Forecasting

Published in print July 2011 | ISBN: 9780195398649
Published online September 2012 | | DOI: http://dx.doi.org/10.1093/oxfordhb/9780195398649.013.0003

Series: Oxford Handbooks

 Dynamic Factor Models

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This article surveys work on a class of models, dynamic factor models (DFMs), that has received considerable attention in the past decade because of their ability to model simultaneously and consistently data sets in which the number of series exceeds the number of time series observations. The aim of this survey is to describe the key theoretical results, applications, and empirical findings in the recent literature on DFMs. The article is organized as follows. The first issue at hand for the econometrician is to estimate the factors and to ascertain how many factors there are; these two topics are covered in Sections 2 and 3. Once one has reliable estimates of the factors, there are a number of things one can do with them beyond using them for forecasting, including using them as instrumental variables, estimating factor-augmented vector autoregressions, and estimating dynamic stochastic general equilibrium models; these applications are covered in Section 4. Section 5 discusses some extensions.

Keywords: time series; economic forecasting; vector autoregressions; general equilibrium models

Article.  11386 words. 

Subjects: Economics ; Econometric and Statistical Methods and Methodology: General

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