Factor-guided estimation of large covariance matrix function with conditional functional sparsity

Abstract: This paper addresses the fundamental task of estimating covariance matrix functions for high-dimensional functional data/functional time series. We consider two functional factor structures encompassing either functional factors with scalar loadings or scalar factors with functional loadings, and postulate functional sparsity on the covariance of idiosyncratic errors after taking out the common unobserved factors. To facilitate estimation, we rely on the spiked matrix model and its functional generalization, and derive some novel asymptotic identifiability results, based on which we develop DIGIT and FPOET estimators under two functional factor models, respectively. Both estimators involve performing associated eigenanalysis to estimate the covariance of common components, followed by adaptive functional thresholding applied to the residual covariance. We also develop functional information criteria for the purpose of model selection. The convergence rates of estimated factors, loadings, and conditional sparse covariance matrix functions under various functional matrix norms, are respectively established for DIGIT and FPOET estimators. Numerical studies including extensive simulations and two real data applications on mortality rates and functional portfolio allocation are conducted to examine the finite-sample performance of the proposed methodology.