Title: Estimating non-stationary common factor: Implications for risk sharing
Authors: Pilar Poncela - JRC (Italy) [presenting]
Esther Ruiz - Universidad Carlos III de Madrid (Spain)
Francisco Corona - INEGI (Mexico)
Abstract: The finite sample properties of alternative factor extraction procedures in the context of non-stationary Dynamic Factor Models (DFMs) are analyzed and compared. On top of considering procedures already available in the literature, we extend the hybrid method based on the combination of principal components and Kalman filter and smoothing algorithms to non-stationary models. We show that, if the idiosyncratic noises are non-stationary, procedures based on extracting the factors using the nonstationary original series work better than those based on differenced variables. We apply the methodology to the analysis of cross-border risk sharing fitting non-stationary DFM to aggregate Gross Domestic Product and Consumption of a set of 21 industrialized countries from the Organization for Economic Co-operation and Development (OECD). The goal is to check if international risk sharing is a short or long-run issue.