A Bayesian Generalized Factor Model with Comparative Analysis

A Bayesian Generalized Factor Model with Comparative Analysis

Title : A Bayesian Generalized Factor Model with Comparative Analysis
Number : 10/18
Author(s) : Necati Tekatlı
Language : English
Date : October 2010
Abstract : This paper has two major objectives. First, we develop and implement a Bayesian generalized factor model that allows for non-orthogonality of the idiosyncratic factors and the flexibility of cross-sectional and time series dimensions. Second, we evaluate the significance of the orthogonality assumption in factor models, a controversial assumption discussed in the recent literature. To this end, we propose a simple methodology to choose the generalized factor model that best determines the idiosyncratic correlations and provide a comparative analysis between the classical and generalized factor models. The proposed methodology is applied to both the simulated data and the foreign exchange rate data.
Keywords : Factor model, Bayesian time series, MCMC simulation, Model selection
JEL Codes : C11; C32; C52

A Bayesian Generalized Factor Model with Comparative Analysis
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