Common factors

Heather M. Anderson

doi:10.1007/978-1-349-58802-2_268

Common factors

Research output: Chapter in Book/Report/Conference proceeding › Encyclopaedia / Dictionary Entry › Other › peer-review

Abstract

Economic analysis frequently involves the study of variables that exhibit similar behaviour, and it is often of interest to model this comovement. Well-known examples of comovement in multivariate data sets include business cycles in macroeconomic indicators and shifts in the entire term structure of interest rates, and researchers sometimes attribute this comovement to a small set of underlying forces or latent ‘factors’ that influence each variable in the system. It is then convenient to think of the variation in each variable in the system as the sum of two types of (unobserved) components, one of which captures variation that is due to ‘common factors’, while the other captures all other variation. Models that attribute comovement to common factors are called common factor models, and common factor analysis involves the identification and study of the common factors.

Original language	English
Title of host publication	The New Palgrave Dictionary of Economics
Subtitle of host publication	Second Edition
Editors	Steven N. Durlauf, Lawrence E. Blume
Place of Publication	Basingstoke Hampshire UK
Publisher	Palgrave Macmillan
Pages	913-916
Number of pages	4
Volume	2
Edition	2nd
ISBN (Electronic)	9781349588022
ISBN (Print)	9780333786765
DOIs	https://doi.org/10.1007/978-1-349-58802-2_268
Publication status	Published - 2008
Externally published	Yes

Access to Document

10.1007/978-1-349-58802-2_268

Cite this

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title = "Common factors",

abstract = "Economic analysis frequently involves the study of variables that exhibit similar behaviour, and it is often of interest to model this comovement. Well-known examples of comovement in multivariate data sets include business cycles in macroeconomic indicators and shifts in the entire term structure of interest rates, and researchers sometimes attribute this comovement to a small set of underlying forces or latent {\textquoteleft}factors{\textquoteright} that influence each variable in the system. It is then convenient to think of the variation in each variable in the system as the sum of two types of (unobserved) components, one of which captures variation that is due to {\textquoteleft}common factors{\textquoteright}, while the other captures all other variation. Models that attribute comovement to common factors are called common factor models, and common factor analysis involves the identification and study of the common factors.",

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AB - Economic analysis frequently involves the study of variables that exhibit similar behaviour, and it is often of interest to model this comovement. Well-known examples of comovement in multivariate data sets include business cycles in macroeconomic indicators and shifts in the entire term structure of interest rates, and researchers sometimes attribute this comovement to a small set of underlying forces or latent ‘factors’ that influence each variable in the system. It is then convenient to think of the variation in each variable in the system as the sum of two types of (unobserved) components, one of which captures variation that is due to ‘common factors’, while the other captures all other variation. Models that attribute comovement to common factors are called common factor models, and common factor analysis involves the identification and study of the common factors.

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