The Canonical Decomposition of Factor Models: Weak Factors are Everywhere (opens in new tab)

arXiv:2307.10067v4 Announce Type: replace-cross Abstract: We derive a novel canonical decomposition of factor models encompassing both the static factor model - where factors are loaded only contemporaneously - and the Generalised Dynamic Factor Model - where factors are loaded with lags. This decomposition features a new term: the weak common component, defined as the difference between the dynamic and static common components. It is driven by (possibly infinitely many) non-pervasive weak fa...