Maximum a Posteriori Estimation of Dynamic Factor Models with Incomplete Data (2207.01922v2)

Abstract: In this paper, we present a method of maximum a posteriori estimation of parameters in dynamic factor models with incomplete data. We extend maximum likelihood expectation maximization iterations by Ba\'nbura & Modugno (2014) to penalized counterparts by applying parameter shrinkage in a Minnesota prior style fashion, also considering factors loading onto variables dynamically. A heuristic and adapting shrinkage scheme is considered. The algorithm is applicable to any arbitrary pattern of missing data, including different publication dates, sample lengths and frequencies. The method is evaluated in a Monte Carlo study, generally performing favourably, and at least comparably, to maximum likelihood.