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Analyzing business and financial cycles using multi-level factor models

Author

Listed:
  • Jörg Breitung
  • Sandra Eickmeier
Abstract
This paper compares alternative estimation procedures for multi-level factor models which imply blocks of zero restrictions on the associated matrix of factor loadings. We suggest a sequential least squares algorithm for minimizing the total sum of squared residuals and a two-step approach based on canonical correlations that are much simpler and faster than Bayesian approaches previously employed in the literature. Monte Carlo simulations suggest that the estimators perform well in typical sample sizes encountered in the factor analysis of macroeconomic data sets. We apply the methodologies to study international co-movements of business and financial cycles as well as asymmetries over the business cycle in the US.

Suggested Citation

  • Jörg Breitung & Sandra Eickmeier, 2014. "Analyzing business and financial cycles using multi-level factor models," CAMA Working Papers 2014-43, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2014-43
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-05/43_2014_breitung_eickmeier.pdf
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    Full references (including those not matched with items on IDEAS)

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    Cited by:

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    3. Strohsal, Till & Proaño, Christian R. & Wolters, Jürgen, 2019. "Characterizing the financial cycle: Evidence from a frequency domain analysis," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 568-591.
    4. Alina Bobasu & Lucia Quaglietti & Martino Ricci, 2024. "Tracking Global Economic Uncertainty: Implications for the Euro Area," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(2), pages 820-857, June.
    5. Schüler, Yves S. & Hiebert, Paul P. & Peltonen, Tuomas A., 2020. "Financial cycles: Characterisation and real-time measurement," Journal of International Money and Finance, Elsevier, vol. 100(C).
    6. Hartwig, Benny & Meinerding, Christoph & Schüler, Yves S., 2021. "Identifying indicators of systemic risk," Journal of International Economics, Elsevier, vol. 132(C).
    7. Christian Menden & Christian R. Proaño, 2017. "Dissecting the financial cycle with dynamic factor models," Quantitative Finance, Taylor & Francis Journals, vol. 17(12), pages 1965-1994, December.
    8. Laura E. Jackson & M. Ayhan Kose & Christopher Otrok & Michael T. Owyang, 2016. "Specification and Estimation of Bayesian Dynamic Factor Models: A Monte Carlo Analysis with an Application to Global House Price Comovement," Advances in Econometrics, in: Dynamic Factor Models, volume 35, pages 361-400, Emerald Group Publishing Limited.
    9. Till Strohsal & Christian R. Proaño & Jürgen Wolters, 2019. "Assessing the cross-country interaction of financial cycles: evidence from a multivariate spectral analysis of the USA and the UK," Empirical Economics, Springer, vol. 57(2), pages 385-398, August.
    10. Gerhard Rünstler & Marente Vlekke, 2018. "Business, housing, and credit cycles," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(2), pages 212-226, March.
    11. Hakan Kara & Pinar Ozlu & Deren Unalmis, 2015. "Turkiye icin Finansal Kosullar Endeksi," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 15(3), pages 41-73.
    12. Bonciani, Dario & Ricci, Martino, 2020. "The international effects of global financial uncertainty shocks," Journal of International Money and Finance, Elsevier, vol. 109(C).
    13. Li, Xiao-Lin & Yan, Jing & Wei, Xiaohui, 2021. "Dynamic connectedness among monetary policy cycle, financial cycle and business cycle in China," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 640-652.
    14. Schüler, Yves Stephan & Hiebert, Paul P. & Peltonen, Tuomas A., 2015. "Characterising the financial cycle: A multivariate and time-varying approach," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112985, Verein für Socialpolitik / German Economic Association.
    15. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    16. Antoine A. Djogbenou, 2020. "Comovements in the real activity of developed and emerging economies: A test of global versus specific international factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(3), pages 344-370, April.
    17. Strohsal, Till & Proaño Acosta, Christian & Wolters, Jürgen, 2015. "How do financial cycles interact? Evidence from the US and the UK," SFB 649 Discussion Papers 2015-024, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    18. Bjarni G. Einarsson & Kristófer Gunnlaugsson & Thorvardur Tjörvi Ólafsson & Thórarinn G. Pétursson, 2016. "The long history of financial boom-bust cycles in Iceland - Part II: Financial cycles," Economics wp72, Department of Economics, Central bank of Iceland.
    19. repec:hum:wpaper:sfb649dp2015-021 is not listed on IDEAS
    20. Breitung, Jörg & Eickmeier, Sandra, 2015. "Analyzing business cycle asymmetries in a multi-level factor model," Economics Letters, Elsevier, vol. 127(C), pages 31-34.
    21. Schüler, Yves S. & Peltonen, Tuomas A. & Hiebert, Paul, 2017. "Coherent financial cycles for G-7 countries: Why extending credit can be an asset," ESRB Working Paper Series 43, European Systemic Risk Board.

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    More about this item

    Keywords

    Factor models; canonical correlations; international business cycles; financial cycles; business cycle asymmetries;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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