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Another look into the factor model black box: factor interpretation and structural (in)stability

Abstract : This paper considers two families of methods allowing to get interpretable factors without imposing their interpretation a priori: factor rotations and sparse PCA. Monte Carlo simulations show their performance in recovering the correct factor structure. In an empirical application with a large U.S. macroeconomic dataset, they recover the same factor structure, offering a clear economic interpretation. This factor representation seems more natural and informative than competitors, offering new lens to disentangle the driving forces within a factor model. In particular, the structural instability appears to be more limited, and of different nature than what was previously found.
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https://halshs.archives-ouvertes.fr/halshs-02235543
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Submitted on : Wednesday, February 5, 2020 - 10:51:17 AM
Last modification on : Tuesday, September 22, 2020 - 3:48:33 AM
Long-term archiving on: : Wednesday, May 6, 2020 - 3:56:36 PM

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  • HAL Id : halshs-02235543, version 2

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Thomas Despois, Catherine Doz. Another look into the factor model black box: factor interpretation and structural (in)stability. 2020. ⟨halshs-02235543v2⟩

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