A criterion for the number of factors

Ard H. J. den Reijer, Jan P. A. M. Jacobs, Pieter W. Otter
2020 Communications in Statistics - Theory and Methods  
This note proposes a new criterion for the determination of the number of factors in an approximate static factor model. The criterion is strongly associated with the scree test and compares the differences between consecutive eigenvalues to a threshold. The size of the threshold is derived from a hyperbola and depends only on the sample size and the number of factors k. Monte Carlo simulations compare its properties with well-established estimators from the literature. Our criterion shows
more » ... riterion shows similar results as the standard implementations of these estimators, but is not prone to a lack of robustness against a too large a priori determined maximum number of factors k max . ARTICLE HISTORY
doi:10.1080/03610926.2020.1713376 fatcat:i2f226jyjbc27jpoqboiw54t5a