LAUSR

ABSTRACT This paper derives Akaike information criterion (AIC), corrected AIC, the Bayesian information criterion (BIC) and Hannan and Quinn’s information criterion for approximate factor models assuming a large number of cross-sectional observations and studies the consistency properties of these information criteria. It also reports extensive simulation results comparing the performance of the extant and new procedures for the selection of the number of factors. The simulation results show the difficulty of determining which criterion performs best. In practice, it is advisable to consider several criteria at the same time, especially Hannan and Quinn’s information criterion, Bai and Ng’s ICp2 and BIC3, and Onatski’s and Ahn and Horenstein’s eigenvalue-based criteria. The model-selection criteria considered in this paper are also applied to Stock and Watson’s two macroeconomic data sets. The results differ considerably depending on the model-selection criterion in use, but evidence suggesting five factors for the first data and five to seven factors for the second data is obtainable.