Factor Strength Estimation in Vector and Matrix Time Series Factor Models

TL;DR

This paper introduces new estimators for assessing the strength of both local and non-local weak factors in vector and matrix time series models, with proven consistency and demonstrated effectiveness through simulations and real data analysis.

Contribution

It is the first to propose and prove the consistency of estimators for weak factor strengths, including non-local factors, in vector and matrix-valued time series models.

Findings

Estimators accurately recover true factor strengths in simulations.

Weak, non-local factors are present in NYC taxi traffic data.

Factor strength influences estimation procedures and accuracy.

Abstract

Most factor modelling research in vector or matrix-valued time series assume all factors are pervasive/strong and leave weaker factors and their corresponding series to the noise. Weaker factors can in fact be important to a group of observed variables, for instance a sector factor in a large portfolio of stocks may only affect particular sectors, but can be important both in interpretations and predictions for those stocks. While more recent factor modelling researches do consider ``local'' factors which are weak factors with sparse corresponding factor loadings, there are real data examples in the literature where factors are weak because of weak influence on most/all observed variables, so that the corresponding factor loadings are not sparse (non-local). As a first in the literature, we propose estimators of factor strengths for both local and non-local weak factors, and prove their consistency with rates of convergence spelt out for both vector and matrix-valued time series factor models. Factor strength has an important indication in what estimation procedure of factor models to follow, as well as the estimation accuracy of various estimators (Chen and Lam, 2024). Simulation results show that our estimators have good performance in recovering the true factor strengths, and an analysis on the NYC taxi traffic data indicates the existence of weak factors in the data which may not be localized.