D'Agostino, Antonello (contributor); … - 2006
components are cross-sectionally
orthogonal.
2.1 Approximate Factor Structures
Suppose that X
t
= (x
1t
;:::;x
nt
)
0
is the … standardized version of Y
t
, i.e.
x
it
=
y
it
¡„
i
i
; „
i
= E[y
it
];
i
=
q
E[(y
it
¡„
i
)
2
]
If X
t
is described by a … factor model, it can be written as the sum of two orthogonal
components
1
:
x
it
= b
i
(L)f
t
+»
it
= [b
i0
;:::;b
is
]
0
B …