{"title":"Factor Models","authors":"M. Hashem, A. Chudik, M. Pesaran","doi":"10.1002/9781119450290.ch9","DOIUrl":"https://doi.org/10.1002/9781119450290.ch9","url":null,"abstract":"This paper introduces a novel approach for dealing with the ‘curse of dimensionality’ in the case of large linear dynamic systems. Restrictions on the coefficients of an unrestricted VAR are proposed that are binding only in a limit as the number of endogenous variables tends to infinity. It is shown that under such restrictions, an infinite-dimensional VAR (or IVAR) can be arbitrarily well characterized by a large number of finite-dimensional models in the spirit of the global VAR model proposed in Pesaran et al. (JBES, 2004). The paper also considers IVAR models with dominant individual units and shows that this will lead to a dynamic factor model with the dominant unit acting as the factor. The problems of estimation and inference in a stationary IVAR with unknown number of unobserved common factors are also investigated. A cross section augmented least squares estimator is proposed and its asymptotic distribution is derived. Satisfactory small sample properties are documented by Monte Carlo experiments. An empirical application to modelling of real GDP growth and investmentoutput ratios provides an illustration of the proposed approach. Considerable heterogeneities across countries and significant presence of dominant effects are found. The results also suggest that increase in investment as a share of GDP predict higher growth rate of GDP per capita for non-negligible fraction of countries and vice versa. JEL Code: C10, C33, C51, O40. Keywords: large N and T panels, weak and strong cross section dependence, VAR, global VAR, factor models, capital accumulation and growth. Alexander Chudik Cambridge University Faculty of Economics Austin Robinson Building Sidgwick Avenue Cambridge, CB3 9DD United Kingdom ac474@cam.ac.uk M. Hashem Pesaran Cambridge University Faculty of Economics Austin Robinson Building Sidgwick Avenue Cambridge, CB3 9DD United Kingdom mhp1@econ.cam.ac.uk November 19, 2007 We are grateful to Elisa Tosetti for helpful comments and suggestions. 1 Introduction Following the seminal work of Sims (1980), vector autoregressive models (VARs) are widely used in macroeconometrics and \u0085nance. VARs provide a exible framework for the analysis of complex dynamics and interactions that exist between variables in the national and global economy. However, the application of the approach in practice is often limited to a handful of variables which could lead to misleading inference if important variables are omitted merely to accommodate the VAR modelling strategy. Number of parameters to be estimated grows at the quadratic rate with the number of variables, which is limited by the size of typical data sets to no more than 5 to 7. In many empirical applications, this is not satisfactory. Some restrictions must be imposed for the analysis of large systems. To deal with this so-called curse of dimensionality, two di¤erent approaches have been suggested in the literature: (i) shrinkage of the parameter space and (ii) shrinkage of the data. Par","PeriodicalId":385006,"journal":{"name":"Modern Equity Investing Strategies","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127079072","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Models of the Limit-Order Markets","authors":"","doi":"10.1142/9789811239502_0003","DOIUrl":"https://doi.org/10.1142/9789811239502_0003","url":null,"abstract":"","PeriodicalId":385006,"journal":{"name":"Modern Equity Investing Strategies","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123913726","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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