skip to content

Faculty of Economics

Journal Cover

Onatski, A. and Wang, C.

Spurious Factor Analysis

Econometrica

Vol. 89(2) pp. 591-614 (2021)

Abstract: This paper draws parallels between the principal components analysis of factorless high-dimensional nonstationary data and the classical spurious regression. We show that a few of the principal components of such data absorb nearly all the data variation. The corresponding scree plot suggests that the data contain a few factors, which is corroborated by the standard panel information criteria. Furthermore, the Dickey–Fuller tests of the unit root hypothesis applied to the estimated “idiosyncratic terms” often reject, creating an impression that a few factors are responsible for most of the nonstationarity in the data. We warn empirical researchers of these peculiar effects and suggest to always compare the analysis in levels with that in differences.

Keywords: Spurious regression, principal components, factor models, Karhunen-Loève expansion

Author links: Alexey Onatskiy  

Publisher's Link: https://onlinelibrary.wiley.com/doi/full/10.3982/ECTA16703

Open Data link: https://www.econometricsociety.org/content/supplement-spurious-factor-analysis

Keynes Fund Project(s):
High-dimensional Cointegration Analysis (JHOY)  



Cambridge Working Paper in Economics Version of Paper: Spurious Factor Analysis, Onatski, A. and Wang, C., (2020)

Papers and Publications



Recent Publications


Bhattacharya, D., Dupas, P. and Kanaya, S. Demand and Welfare Analysis in Discrete Choice Models with Social Interactions Review of Economic Studies [2023]

Elliott, M., Golub, B. and Leduc, M. V. Supply Network Formation and Fragility American Economic Review [2022]

Ritz, R. Does Competition Increase Pass-Through? Rand Journal of Economics [2024]

Carneiro, P., Liu, K. and Salvanes, K. G. The Supply of Skill and Endogenous Technical Change: Evidence from a College Expansion Reform Journal of the European Economic Association [2023]