A0412
Title: Dynamic factor models with cluster structure
Authors: Angela Caro Navarro - Universidad Carlos III de Madrid (Spain) [presenting]
Maximo Camacho - Universidad de Murcia (Spain)
Daniel Pena - Universidad Carlos III de Madrid (Spain)
Abstract: Understanding whether the drivers of industrial energy prices are worldwide, group-specific or country-specific is a key issue in economics. This requires flexible econometric models to examine large data sets containing a significant variety of industrial sectors in different countries. To this end, an extension of a dynamic factor model with group structure is proposed to account for observable country-specific explanatory variables, and Monte Carlo simulations are developed to show its good finite sample performance. Using data from 12 industrial sectors in 30 countries during the period from 1995 to 2015, three drivers of energy prices are found: (i) a common factor, the main driving force, captures the worldwide dynamics; (ii) country-specific variables, mainly related to inflation and the use of renewable and waste resources; and (iii) group-specific factors, which are more related to country affiliation than to sector classification.
