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Eigenvalue Ratio Test for the Number of Factors
Author(s) -
Ahn Seung C.,
Horenstein Alex R.
Publication year - 2013
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta8968
Subject(s) - estimator , eigenvalues and eigenvectors , bounded function , variance (accounting) , mathematics , matrix (chemical analysis) , statistics , variance components , covariance matrix , econometrics , mathematical analysis , economics , physics , materials science , accounting , quantum mechanics , composite material
This paper proposes two new estimators for determining the number of factors ( r ) in static approximate factor models. We exploit the well‐known fact that the r largest eigenvalues of the variance matrix of N response variables grow unboundedly as N increases, while the other eigenvalues remain bounded. The new estimators are obtained simply by maximizing the ratio of two adjacent eigenvalues. Our simulation results provide promising evidence for the two estimators.