Journal
ECONOMETRICA
Volume 81, Issue 3, Pages 1203-1227Publisher
WILEY-BLACKWELL
DOI: 10.3982/ECTA8968
Keywords
Approximate factor models; number of factors; eigenvalues
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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.
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