dynamic factor models

  • An Introduction to Dynamic Factor Models

    Introduction For some macroeconomic applications it might be interesting to see whether a set of obserable variables depends on common drivers. The estimation of such common factors can be done using so-called factor analytical models, which have the form \[x_t = \lambda f_t + u_t,\] where \(x_t\) is an \(M\)-dimensional vector of observable variables, \(f_t\) is an \(N \times 1\) vector of unobserved factors, \(\lambda\) is an \(M \times N\) matrix of factor loadings and \(u_t\) is an error term.