The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Factor Models

  • Jushan Bai
Reference work entry


Factor models explain correlations among a set of variables. By postulating that the variables are linked with a small number of latent components, factor models imply a particular structure for the correlation matrix. This article discusses the model’s identification and estimation as well as their applications in economics.


Approximate factor model Arbitrage pricing theory Cointegration Common factors Covariance matrix Diffusion index forecasting Dynamic factors Factor analysis Factor models Forecasting Principal components analysis Sample correlation matrix Unit roots 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Jushan Bai
    • 1
  1. 1.