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Working Paper
House Price Growth Interdependencies and Comovement
This paper examines house price diffusion across metropolitan areas in the United States. We develop a generalization of the Hamilton and Owyang (2012) Markov-switching model, where we incorporate direct regional spillovers using a spatial weighting matrix. The Markov-switching framework allows consideration for house price movements that occur due to similar timing of downturns across MSAs. The inclusion of the spatial weighting matrix improves fit compared to a standard endogenous clustering model. We find seven clusters of MSAs that experience idiosyncratic recessions plus one distinct ...
Working Paper
International Stock Comovements with Endogenous Clusters
We examine international stock return comovements of country-industry portfolios. Our model allows comovements to be driven by a global and a cluster component, with the cluster membership endogenously determined. Results indicate that country-industry portfolios tend to cluster mainly within geographical areas that can include one or more countries. The cluster compositions substantially changed over time, with the emergence of clusters among European countries from the early 2000s. The cluster component was the main driver of country-industry portfolio returns for most of the sample, except ...
Working Paper
International Stock Comovements with Endogenous Clusters
We use an endogenous cluster factor model to examine international stock return comovements of country-industry portfolios. Our model allows country-industry portfolio comovements to be driven by a global and a cluster component, with the cluster membership endogenously determined. Results indicate that country-industry portfolios tend to cluster mainly within geographical areas that can include one or more countries. The cluster component was the main driver of country-industry portfolio returns for most of the sample, except from mid-2000 to mid-2010s when the global component had a more ...
Working Paper
Tests of Equal Accuracy for Nested Models with Estimated Factors
In this paper we develop asymptotics for tests of equal predictive ability between nested models when factor-augmented regression models are used to forecast. We provide conditions under which the estimation of the factors does not affect the asymptotic distributions developed in Clark and McCracken (2001) and McCracken (2007). This enables researchers to use the existing tabulated critical values when conducting inference. As an intermediate result, we derive the asymptotic properties of the principal components estimator over recursive windows. We provide simulation evidence on the finite ...
Working Paper
Metro Business Cycles
We construct monthly economic activity indices for the 50 largest U.S. metropolitan statistical areas (MSAs) beginning in 1990. Each index is derived from a dynamic factor model based on twelve underlying variables capturing various aspects of metro area economic activity. To accommodate mixed-frequency data and differences in data-publication lags, we estimate the dynamic factor model using a maximum- likelihood approach that allows for arbitrary patterns of missing data. Our indices highlight important similarities and differences in business cycles across MSAs. While a number of MSAs ...
Working Paper
Identification Through Sparsity in Factor Models
Factor models are generally subject to a rotational indeterminacy, meaning that individualfactors are only identified up to a rotation. In the presence of local factors, which only affecta subset of the outcomes, we show that the implied sparsity of the loading matrix can be usedto solve this rotational indeterminacy. We further prove that a rotation criterion based on the`1-norm of the loading matrix can be used to achieve identification even under approximatesparsity in the loading matrix. This enables us to consistently estimate individual factors, andto interpret them as structural ...
Working Paper
A Generalized Factor Model with Local Factors
I extend the theory on factor models by incorporating local factors into the model. Local factors only affect an unknown subset of the observed variables. This implies a continuum of eigenvalues of the covariance matrix, as is commonly observed in applications. I derive which factors are pervasive enough to be economically important and which factors are pervasive enough to be estimable using the common principal component estimator. I then introduce a new class of estimators to determine the number of those relevant factors. Unlike existing estimators, my estimators use not only the ...
Working Paper
Simultaneous Spatial Panel Data Models with Common Shocks
I consider a simultaneous spatial panel data model, jointly modeling three effects: simultaneous effects, spatial effects and common shock effects. This joint modeling and consideration of cross-sectional heteroskedasticity result in a large number of incidental parameters. I propose two estimation approaches, a quasi-maximum likelihood (QML) method and an iterative generalized principal components (IGPC) method. I develop full inferential theories for the estimation approaches and study the trade-off between the model specifications and their respective asymptotic properties. I further ...
Working Paper
Quasi Maximum Likelihood Analysis of High Dimensional Constrained Factor Models
Factor models have been widely used in practice. However, an undesirable feature of a high dimensional factor model is that the model has too many parameters. An effective way to address this issue, proposed in a seminal work by Tsai and Tsay (2010), is to decompose the loadings matrix by a high-dimensional known matrix multiplying with a low-dimensional unknown matrix, which Tsai and Tsay (2010) name the constrained factor models. This paper investigates the estimation and inferential theory of constrained factor models under large-N and large-T setup, where N denotes the number of cross ...
Working Paper
Betting the House
Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection ...