The paper introduces an approximate dynamic factor model based on the extraction of principal components from a very large number of leading indicators stacked at various lags. The model is designed to produce short-term forecasts that are computed with the EM algorithm implemented with the...

We examine finite sample properties of estimators for approximate factor models when N is small. Contrary to the “rule-of-thumb”, we find that the principal component analysis estimator and the quasi-maximum likelihood estimator perform well even when N is small.