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Unformatted text preview: Interpreting / Testing for the number of Factors
Usually the ﬁrst few factors are market / industry related. As N ↑, K ↑; let Q = matrix: 1; the pdf of eigenvalues of the correlation p (λmax − λ)(λ − λmin ) Q p (λ) = , 2πσ 2 λ 1 +2 Q r 1 , Q
T N where λmax λmin = = 1+ 1+ r 1 1 −2 Q Q Use the pdf to test for the number of factors. Simply use Scree plot / AIC More weight to recent data: ˆ Ω= P
i λi Rt −i Rt −i Pi λ ...
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- Summer '10