Friday, April 28, 2017

Dynamic Factor Models in EViews

One of the current buzz topics in macro-econometrics is that of dynamic factor models. 

Factor models allow researchers to work with a large number of variables by reducing them down to a handful (often two) components, allowing tractable results to be obtained from unwieldy data. 

A natural extension to factor models is to allow dynamics to enter the relationships.  These dynamic factor models have become extremely popular due to their ability to model business cycles, and perform both forecasting and nowcasting (predicting the current state of the economy).

Although EViews has built-in factor analysis, we do not (yet!) have dynamic factor models included. 

Luckily two researchers from the Ministry of Finance in Sweden have recently posted a paper, and corresponding code, that estimates dynamic factor models in EViews with a simple programming subroutine utilising EViews' state-space estimation object.

This paper looks fantastic - good job guys!

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