Econometrica · 2013 · 952 citations · 32 references
Social SciencesBiostatisticsExperimental DesignItem Response TheoryPsychometricsFactor AnalysisFactor ModelsEigenvaluesStatic ModelsVariance-covariance Matrix Estimation
This paper proposes two new estimators for determining the number of factors (r) in static approximate factor models. We exploit the well-known fact that the r largest eigenvalues of the variance matrix of N response variables grow unboundedly as N increases, while the other eigenvalues remain bounded. The new estimators are obtained simply by maximizing the ratio of two adjacent eigenvalues. Our simulation results provide promising evidence for the two estimators.
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