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A Suggestion for a Dynamic Multi Factor Model (DMFM)

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journal contribution
posted on 12.02.2021, 15:01 by HD Gibson, SG Hall, GS Tavlas
We provide a new way of deriving a number of dynamic unobserved factors from a set of variables. We show how standard principal components may be expressed in state space form and estimated using the Kalman filter. To illustrate our procedure, we perform two exercises. First, we use it to estimate a measure of the current account imbalances among northern and southern euro area countries that developed during the period leading up to the outbreak of the euro area crisis, before looking at adjustment in the post-crisis period. Second, we show how these dynamic factors can improve forecasting of the euro exchange rate.

History

Citation

Macroeconomic Dynamics, DOI: https://doi.org/10.1017/S1365100520000619

Author affiliation

School of Business

Version

AM (Accepted Manuscript)

Published in

Macroeconomic Dynamics

Publisher

Cambridge University Press (CUP)

issn

1365-1005

eissn

1469-8056

Copyright date

2021

Available date

11/01/2021

Language

en