A Suggestion for a Dynamic Multi Factor Model final track.pdf (1.21 MB)
A Suggestion for a Dynamic Multi Factor Model (DMFM)
journal contributionposted on 2021-02-12, 15:01 authored 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.
CitationMacroeconomic Dynamics, DOI: https://doi.org/10.1017/S1365100520000619
Author affiliationSchool of Business
- AM (Accepted Manuscript)