Empirical researchers may wonder whether or not a two-way fixed effects estimator (with individual and period fixed effects) is sufficiently sophisticated to isolate the influence of common shocks on the estimation of slope coefficients. If it is not, practitioners need to run the so-called...

A simple data-dependent filtering method is proposed before applying the Bai–Ng method to estimate the number of common factors in the conventional approximate factor model. The asymptotic justification is provided and the finite-sample performance is examined.