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 xt=λft+ut, where xt is an M-dimensional vector of observable variables, ft is an N×1 vector of unobserved factors, λ is an M×N matrix of factor loadings and ut is an error term.