Interpreting the Latent Dynamic Factors by Threshold FAVAR Model

Posted: 19 May 2014 Last revised: 4 Apr 2018

See all articles by Kerem Tuzcuoglu

Kerem Tuzcuoglu

Bank of Canada

Sinem Hacioglu Hoke

Bank of England; University of Bonn - The Bonn Graduate School of Economics

Date Written: January 7, 2015

Abstract

In this paper, we propose a latent threshold FAVAR model. The novelty is the interpretation of factors by observing how frequently factor loadings fall below estimated thresholds and become irrelevant. The results indicate that we are able to relate the factors to specific categories of the data without any prior specification on the data set. Furthermore, the interpretable factors, e.g., real activity factor, unemployment factor and such, are each given shocks along with policy shock to observe the responses of the other factors and individual series. The resulting impulse responses are of the expected sign and magnitude in general. Overall our results yield an intensive layout which factor is associated with different aspects of the economy and how the shocks affect the other factors and variables.

Keywords: Time-varying FAVAR, latent threshold, MCMC, interpretation of latent factors, shrinkage estimation

JEL Classification: C3, E3, E4, E5

Suggested Citation

Tuzcuoglu, Kerem and Hacioglu Hoke, Sinem, Interpreting the Latent Dynamic Factors by Threshold FAVAR Model (January 7, 2015). Available at SSRN: https://ssrn.com/abstract=2438462 or http://dx.doi.org/10.2139/ssrn.2438462

Kerem Tuzcuoglu (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Sinem Hacioglu Hoke

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

University of Bonn - The Bonn Graduate School of Economics ( email )

Adenauerallee 24-26
Bonn, D-53113
Germany

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
703
PlumX Metrics