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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 Papers , Paper 20-25

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 Papers , Paper 19-23

Working Paper
Undiversifying during Crises: Is It a Good Idea?

High levels of correlation among financial assets, as well as extreme losses, are typical during crisis periods. In such situations, quantitative asset allocation models are often not robust enough to deal with estimation errors and lead to identifying underperforming investment strategies. It is an open question if in such periods, it would be better to hold diversified portfolios, such as the equally weighted, rather than investing in few selected assets. In this paper, we show that alternative strategies developed by constraining the level of diversification of the portfolio, by means of a ...
Working Papers (Old Series) , Paper 1628



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