Large-dimensional Robust Factor Analysis with Group Structure

Abstract: In this paper, we focus on exploiting the group structure for large-dimensional factor models, which captures the homogeneous effects of common factors on individuals within the same group. In view of the fact that datasets in macroeconomics and finance are typically heavy-tailed, we propose to identify the unknown group structure using the agglomerative hierarchical clustering algorithm and an information criterion with the robust two-step (RTS) estimates as initial values. The loadings and factors are then re-estimated conditional on the identified groups. Theoretically, we demonstrate the consistency of the estimators for both group membership and the number of groups determined by the information criterion. Under finite second moment condition, we provide the convergence rate for the newly estimated factor loadings with group information, which are shown to achieve efficiency gains compared to those obtained without group structure information. Numerical simulations and real data analysis demonstrate the nice finite sample performance of our proposed approach in the presence of both group structure and heavy-tailedness.