A0529
Title: Prediction intervals for common factors in dynamic factor models with cross-correlated idiosyncratic components
Authors: Esther Ruiz - Universidad Carlos III de Madrid (Spain) [presenting]
Diego Fresoli - Vienna University of Technology (Austria)
Pilar Poncela - Universidad Autonoma de Madrid (Spain)
Abstract: In economics, principal components are the generalized version that takes into account heteroscedasticity, and Kalman lter and smoothing procedures are among the most popular procedures for factor extraction in the context of dynamic factor models. When the idiosyncratic components are wrongly assumed to be cross-sectionally uncorrelated, prediction intervals for the estimated factors based on standard asymptotic results are overly optimistic. Procedures are proposed to construct accurate confidence for the factors in the presence of cross-correlated idiosyncratic components.
