\\258 \\

The generalized dynamic factor model:

representation theory

by

Mario Forni *
Marco Lippi **

Febbraio 1999

* Università degli Studi di Modena

Dipartimento di Economia Politica
Via Berengario, 51
41100 Modena (Italia)
e-mail: jorni(aJunimo. it

** Università di Roma
Dipartimento di Scienze Economiche
Via Cesalpino, 12
00161 Roma (Italia)
e-mail: lippi(eìjgiannutri. ca~pur. it
 ABSTRACT

This paper, along with the companion paper Forni, Hallin, Lippi and Reichlin (1998), in-
troduces a new model-the generalized dynamic factor model-for the empirica! analysis of
financial and macroeconomic data sets characterized by a large number of observations both
cross-section and over time. This model provides a generalization of the static approximate
factor model of Chamberlain (1983) and Chamberlain and Rothschild (1983) by allowing
seri al correlation within an d across indivi d ual processes, an d of the dynamic factor model (or
index model) of Sargent and Sims (1977) and Geweke (1977) by allowing for non-orthogonal
idiosyncratic terms. While the companion paper concentrates on identification and estima-
tion, here we give a full characterization of the generalized dynamic factor model in terms of
observable spectral density matrices, thus laying a firm basis for the empirical implementation
of the model.

JEL classification nos.: C13, C33, C43.

Keywords: dynamic factor structure, idiosyncratic components, large cross-sections, Hilbert
space.
 l. Introduction 1

1.1 Data sets with many data points both over time and across sections are becoming in-
creasingly available. Think for instance of macroeconomic series on output or employment
w hich are observed for a large number of countries, regions or sectors, or of financial time
series such as the returns on many different assets. Such data sets typically present a good
deal of regularity along the time dimension, so that each time series, taken in isolation, can be
successfully handled by using standard stationary models or their extensions. By contrast,
a.long the cross sectional dimension, data do not ha.ve a natural ordering and correlations
do not present any regular structure. Yet, the series are strongly dependent on each other,
iuplying t ha t uni, ariate modeling would waste information.
We do not have a satisfactory theoretical framework for extracting and analyzing the
enormous amount of information embedded in such large cross sections of time series. VAR
models would be suitable for a small subset of time series, but are inadequate for the whole
data set, because of the huge number of parameters to estimate. The dynamic factor analytic
or index model (Sargent and Sims, 1977, Geweke, 1977) is much better suited, since it is both
ftexible and parsimonious: each variable is represented as the sum of a common component-
i.e. a term depending, possibly with heterogeneous dynamic responses, on a small number
of unobserved factors which are common to all variables-and an idiosyncratic component,
which is orthogonal at any lead and lag both to the common factors and to the idiosyncratic
components of all the other variables.
This feature, mutuai orthogonality of the idiosyncratic components at any lead and
lag, represents a serious weakness of the index model. The assumption is necessary for
identification, but is severely restrictive. As a first example, consider the output of different
industries linked to each other by input-output relations. The output of sector A may well
be related to the output of sector B in a way which is intimately 'cross-regressive', so that
an idiosyncratic shock originated in B propagates, possibly with a lag, to sector A. Similar
local interactions can also arise when there are 'intermediate' shocks, i.e. shocks which are
neither common nor strictly idiosyncratic, such as local events affecting directly more than
one area or technological shocks affecting a few sectors. Finally, consider a data set including
both employment a.nd income for many regions, and assume that each variable is driven
by a national and a regional shock, the second being orthogonal to the first. The regional
components of employment and income, while being orthogonal for different regions, are likely
to be correlateci for the same region. In such a case, although employment, or income, taken
in isolation would satisfy the orthogonality assumption, the index model could not be used
to handle the whole data set.
In this paper, and in the companion paper Forni, Hallin, Lippi and Reichlin (1998),
a new model, that we will call the generalized dynamic factor model, is introduced and
analyzed. The mode l has three important features: (l) it is a finite dynamic factor model,
i.e. the variables depend on a finite number of factors with a quite generai lag structure;
(2) it is based on an infinite sequence of variables and is therefore specifically designed for
the analysis of large cross sections of time series; (3) it allows for both contemporaneous and
lagged correlation between the idiosyncratic terms, and is therefore more generai than the
traditional index model.
1
This paper is part of a research supported by an A.R.C. contract of the Communauté française de
Belgique. The first A uthor also wishes to acknowledge financial aid by MURST (Ministero per l'Università
e la Ricerca Scientifica e Tecnologica). We would like to thank Christine De Mol, Mare Hallin and Lucrezia
Reichlin for constant help ancl support.

l
l. 2 Le t us briefiy summarize the results of the paper. In Section 2 we give our basic definitions
and assumptions. vVe start with a double sequence of stochastic variables {xit, i E N, t E Z::}.
\ì\fe assume that { Xit, t E Z} is stationary for any i and costationary with { Xit, t E Z} for
any j. W e do not assume an ARMA structure for the x's. vVe only require the existence of
a spectral density matrix ~~ for the vector ( XJ t X2t Xnt )'.
Tn Section 3 we introduce idiosyncratic sequences. To give a simple illustration of the
definition of idiosyncratic sequences adopted here, Jet us consider a sequence {Yi, i E N}
of mutually orthogonal variables, such that var(yi) = a 2 . Taking a sequence of averages
Y,, = 2:::~ 1 aniYi, the variance var (Yn) = a 2 2:::7= 1 a~i tends to zero if and only if 2:::7= 1 a~i
tends to zero; this occurs typically with the arithmetic mean, ani = 1/n. Now, the property
of a vanishing variance for sequences of averages whose squared weights tend to zero does
not require that the y's be mutually orthogonal: for example, if Yi and Yi are correlateci with
the correlation declining as ji- jj, then the var(Yn) vanishes asymptotically. This vanishing
variance of averages, not orthogonality, is precisely what we need in our construction. Thus,
in our definition, the sequence of the x's is idiosyncratic if convergence to zero occurs for any
weighted average, both cross-section and over time,

n k

L L anihXit-h,
i=l. h=-k

provided that the sum of the squared weights tends to zero. We prove, Theorem l, that Xit
is idiosyncratic if and only if the maximum eigenvalue of ~~ is dominateci by an essentially
bounded function of the frequency e.
In Section 4 we introduce our generalized dynamic factor model, i.e. a sequence {xit, i E
N, t E Z::} such that

w h ere bij (L) is a square-summable filter, ( UJt u2t Uqt )' is an orthonormal vector
white noise, f.it is idiosyncratic and orthogonal to the u's at any lead and lag, with the
filters bij (L) fulfilling a condition ensuring that no representation with a smaller number of
"cornmon factors" is possible. We prove in Theorem 2 that a sequence has a generalized
dynamic factor structure with q factors if and only if: (T) the (q+ l )-th eigenvalue of ~~'in
decreasing order, is dominated for any n by an essentially bounded function of the frequency
e; (Il) as n tends to infinity, the q-th eigenvalue diverges for e almost everywhere in [-Jr, 7r].
Thus the unobservable factor structure is completely characterized in terms of properties
of the observable matrices ~~. This result has a very important consequence for empirica!
analysis, as it provides the theoretical basis for heuristic criteria or forma] tests in which
the sequence of nested matrices ~~ is employed to determine whether the model has a finite
dynamic factor structure and what is the number of factors. More precisely, evidence in favor
of conditions (T) and (TI), with the eigenvalues computed from estimateci spectral density
matrices, can be interpreted, given the "if" part of Theorem 2, as evidence that, firstly, the
variables follow a generalized dynamic factor model, and, secondly, that the number of factors
is q.
Theorems 3 and 4 establish uniqueness of the idiosyncratic component f.it and of the
common component Xit - f.it· It must be pointed out that this identification result holds for
the whole infinite sequence of the variables Xit, not for its finite subsets: otherwise stated,

2
identification occurs in the limi t, when the size of the cross-section tends to infinity. Moreover,
note t hat identification of Xi t does not imply identification of the u's or of the filters bij (L),
that might be achieved only by imposing further, economically motivated, restrictions. Such
an issue will no t be discussed in t his paper. Finally, in Theorem 5 we show that the common
component of Xit can be recovered as the limit of the projection of Xit on the dynamic
principal components. This result provides a firm basis for estimation theory.
The case in which the x's are either difference or trend stationary is shortly discussed
in Section 5. Finally, some results that appear as common knowledge but for which no easy
reference was available are gathered in the Appendix.
1.3 In spite of some inevitable overlapping this paper is complementary with respect to the
companion paper mentioned above. The latter concentrates on identification and estimation
of the common and idiosyncratic components, while the main aim of this paper is the full
characterization given in Theorem 2. Moreover, the assumption of rational spectral density,
made in the companion paper, is dropped completely here.
Correlateci idiosyncratic factors, along with infinite cross sectional size, have been in-
troduced in a static model for asset markets by Chamberlain (1983) and Chamberlain and
Rothschild (1983). Our Theorem 2 is a generalization to stochastic processes of results proved
in the static case by Chamberlain and Rothschild. Related models can also be found in Quah
and Sargent (1993), Forni and Reichlin, (1996, 1998), Forni and Lippi (1997), Stock and
Watson (1998).
2. Notation, Basic Definitions and Lemmas
Given a complex matrix D, we denote by D the complex conjugate of the transpose of D.
lnner product and norm in es are the usual Euclidean entities (v, w) = I:::=l Vi'Wi and
lvi = vi:::=! lvil 2 respectively.
Let P = (D, F, P) be a probability space and let L2(P, C) be the linear space of all
complex-valued, zero-mean, square-integrable random variables defined on D. We recall that
L2(P,C), with the inner product defined as (x,y) = E(xy) = cov(x,y), and the norm as
llxll = JE(Ixl 2 ) = Jvar(x), is a Hilbert space on the complex field C. lf Q is a subset
of L2(P,C) we shall denote by span(Q) the minimum closed linear subspace of L 2(P,C)
containing Q. IJ V is a closed linear subspace of L2(P, C) and x E L2(P, C), we denote by
proj(xiV) the orthogonal projection of x on V.
Now consider a double sequence

x= {Xit, i E N, t E Z},
wh ere Xit E L2 (P, C). We adopt the following notation: X = span(x); Xnt is the n-
diniensional column vector (Xl t X2t Xnt )'. Often, when no confusion can arise,
we speak of the process Zt, meaning the process { Zt, t E Z}. We also speak of the spectral
density of Zt. Moreover, considering the m-dimensionai vector process
1
Y = {( Y1t Y2t Yrnt) , tEZ},
we say t hat y belongs to Y ç L2 (P, C) if Yjt belongs to Y for any j and t. In the same way,
we use span(y) to indicate span( {Yjt, j = l, ... , m, t E Z} ).
Assumption l. For any n E N: (l) the process Xnt is covariance stationary; (2) the spectral
measure ofXnt is absolutely continuous (with respect to the Lebesgue measure an [-1r, 1r]),
i.e. Xnt has a spectral density (see Rozanov, 1967, pp. 19-20).

3
 We denote by :E~ the spectral density matrix of Xnt and recall that :E~ is Hermitian,
non-negative definite for any () E [-JT, JT], Lebesgue-measurable, and that J::Jr :E~(())d() is
equal to the variance-covariance matrix of Xnt·
Remark l. Given y and z in X, by definition [[y- zff 2 = var(y- z). On the other hand,
we can define in a natural way two stochastic processes Yt and Zt such that [[y - z[[ 2 =
[[Yt- zt[[ 2 = J::Jr j(())d(), where f is the spectral density of Yt- Zt. For, the definition of X
implies the existence of square-summable filters anj(L) and bnj(L) such that
n n

y =li~ Lanj(L)xjo, z lim

n
L bnj(L)xjo·
j=l j=l

Defining
n n

Yt = lim Lanj(L)Xjt,
n
Zt =li~ L bnj(L)Xjt,
j=l j=l

the processes Yt and Zt are stationary and costationary with Xnt for any n E N. Moreover,
y = Yo, z = zo and [[y- zfl 2 = J::Jr j(())d(), where f is the spectral density of Yt- Zt (for the
existence of the spectral density of Yt, Zt and Yt - Zt, see the Appendix, Fact S). With the
above argument in mind, the generic element of X will be often referred to as Yt, Zt, etc.,
rather than y, z, etc., where Yt, Zt, etc. are stationary and costationary with Xnt, for any n.
fdentical considerations hold if we consider a vector y belonging to X.
Definition l. For i = l, ... , n Jet

be defined as the function associating with () E [-JT, 7r] the i-th eigenvalue, in descending
arder, af:E~(()). The functians À~i will be called the dynamic eigenvalues of:E~.
In the Appendix we prove the following lemmas.
Lemma l. The functions À~i are Lebesgue-measurable in [-JT, 7r] far any n E N and i ::::; n
(in Remark 3 below we shaw that À~i has finite integrai).
Lemma 2. Given i, far n~ i, À~i(()) is nan-decreasing as a functian ofn for any ()E [-JT, JT],
i.e. À~i(e)::::; À~+Ji(e).
A consequence of Lemma 2 is that limn À~i(()) exists for any i and (), and equals
supn À~i(()).
Definition 2. Far any i we define the functian Àf by

Àf (()) = sup À~i(()).

n

ft must be pointed out that Àf is an extended rea! function, i.e. its value may be infinite.
Note also t ha t {() : Àf (()) = oo} may be of null or positive measure, and even coincide with
[-JT, 7r].
Now consider the space L2([-7T, JT], CC) of all functions f : [-JT, 7r] 1-t ccn, with

f(()) = (!J(()) h(())

4
 (a row vector) and f1 [ -1r, 1r] f----7 C, such that

vVith the inner product of f and g and the norm of f defined respectively as

L2([-7r, 1r],C) is a Hilbert space. ln the Appendix we prove the following results.
Lemma 3. There exist n functions p~ 1 , i= 1, ... , n, belonging to L2'([-7r, 1r], q, such that
e
(1) fp~i(e)f =l, for any E [-1r, 1r];
(2) p~ 1 (e)p~.i(e) =O, fori f j and any E [-1r, 1r]; e
(3) p~ 1 (e)~~(e) = >-~ 1 (e)p~ 1 (e) for any E [-1r, 1r].e
Definition 3. An n-tuple o[ functions p~ 1 fulfilling (1), (2) and (3) of Lemma 3 will be
called a se t of dynamic eigenvectors. 2
Given f E L2([-7r, 1r],C), consider the Fourier expansion

f(e) = L= Fke-ike,
k=-=

where Fk = J::.1f f(e)e 1k8de E cn. We shall indicate by f(L) the square summable n-
dimensionai filter

We have

In particular, E~/L) is the filter associateci with the dynamic eigenvector p~.i: [-1r, 1r]----+ cn.
Conversely, if
=
A(L) = AkLk L
k=-=
is a square summable n-dimensionai filter, consider the function A 0 defined as

Ao(e) = A(e-ie) = L= Ake-ike.

k=-=
2
We use "dynamic" for eigenvectors and eigenvalues of :E;'; and related matrices to insist on the dif-
ference between the dynamic analysis developed here and the static approach, based on the eigenvalues of
variance-covariance matrices. For a generai treatment of eigenvalues and eigenvectors of spectral density
matrices, and related filters, see Brillinger (1981).

5
Obviously A 0 belongs to L2([-7T, 1r],C). Moreover A 0 (L) = A(L).
Definition 4. Jf the functions p~J' j = 1, ... , n form a set of dynamic eigenvectors, then
p x . (L )xnt, j = l, ... , n is a se t of dynamic principal components of Xnt.
-n]

The rnain results presented below will employ the filters -px
nl,
(L), derived from the dy-
namic eigenvectors. In generai, being obtained from the Fourier expansion of expressions
involving polynomial roots, such filters are bilatera] and infinite, even when the vector pro-
cess Xnt is a finite moving average.

3. Dynamic averaging sequences, aggregation space, idiosyncratic variables

Definition 5. Considera sequence of positive integers { sn, n E N} and a sequence

{an (L), n E N},

wh ere

vFe say that {an (L), n E N} is a dynamic averaging sequence, DAS henceforth, if

Definition 6. Let Yt E X. We say that Yt is an aggregate ifthere exists a DAS {an(L), n E

N} such that
liman(L)xsnt
n
= Yt·

The set of all the aggregates will be denoted by Q(x) and called the aggregation subspace
ofX.
Remark 2. Jn Assumption l and in Definition 5 we have not supposed that the entries of :E~
or of a~ are bounded in [-7T, 1r]. As a consequence, the elements of the sequence an(L)xsnt
does no t necessarily have finite vari ance, i.e. the integrals J.:1r a~ (B)::E;" (B)a~ (B)dB are not
necessarily finite, which means that an(L)xs"t is not necessarily an element of L2(P,C).
However, convergence of {an(L)xs"t' n E N} has an obvious definition: {an(L)xsnt, n E N}
converges if an(L)xsnt has finite variance for n greater than some n1 and if the sequence
{an(L)xs"t' n E N, n> n1} converges.
Remark 3. Dynamic averaging of x, according to Definition 5, is nothing other than aver-
aging simultaneously both in the cross-section and the time dimension. Precisely

Sn Sn 00

an(L)xsnt =L ani(L)xit =L L anikXit-k,

i= l ·i=l k=-=

where the coefficients anik are complex numbers fulfilling the condition

s.,t oo

6
Infinite averaging in the time dimension is convenient since, as anticipateci above, the aver-
aging sequences that we are going to employ are typically infinite, but not strictly necessary.
It is easily seen that the same aggregation space would be obtained by taking finite averages
of any length in the time dimension
Sn Tni

l:= l:= anikXit-k,

i=l k=-Pn·i

with the condition

li~n l:= l:= 2
lanikl =O.
i=l k=-p.,..;

Lemma 4. The set Q(x) is a closed subspace ofX.

Proof. Assume that Zt limm Ymt, with Ymt E Q(x). Let Ymt = limn amn(L)xsmnt, where

{amn(L), n E N}

is a DAS. Let mi be such that llzt- Ym.,tll < 1/i and ni such that lla~,nJI < 1/i and
IIYm;t- am,n.; (L)xsm n t li <l/i. The sequence
' 'i 'L

is a DAS and

QED
Definition 7. Suppose that x fulfills Assumption l. We sa;y that x is idiosyncratic if
limn an(L)xs,.t =O far any DAS {an(L), n E N}.
IJ x is idiosyncratic then obviously Q(x) = {0}. However, as the next example shows,
the converse does not hold.
Example l. Assume that Xit j_ Xjt-k for any i cf j and any k E Z, that Xit is a white noise
for any i, and that llxitll 2 =i. Define

o 1) o

The sequence {cn(L), n E N} is a DAS. Moreover llcn(L)xntll 2 l, so that x 1s not

idiosyncratic. Now let Yt be an aggregate, so that

(1)

where {an(L), n E N} is a DAS. Since Yt E X and the Xit's are mutually orthogonal white
noises, then
00 00

Yt = l:= l:= bjkXit-k· (2)

j=l k=-oo

7
Moreover, representations (l) and (2) are unique and limn anjk = bjk for any j and k. On
the other hand,

liJfl L>~(8)j 2 dB ~ li;p [t J~== lan;kl'] ~O,

so that bjk = O for any j and k, i.e. Yt =O. Thus Q(x) = {O} although x is not idiosyncratic.
lf the vector Xnt is a white noise for any n, i.e. if the matrix ~~ and its eigenvalues
are constant as functions of e,
then x is idiosyncratic if and only if ).~ 1 is bounded as a
function of n (see Chamberlain, 1983, Chamberlain and Rothschild, 1983). The theorem
below generalizes this result to any x fulfilling Assumption l: x is idiosyncratic if and only if
the functions À~ 1 are uniformly bounded in [-1r, 1r]- D, where D has null Lebesgue measure,
i.e. if there exists a real M such that ).~ 1 (B) :::; NI for any n E N and ()E [-1r, 1r]- D.
I n the sequel .C will denote the Lebesgue measure on R Let us recall that an extended
rea] function f is essentially bounded if there exists a real c and a subset D of [-1r, 1r]
such that .C(D) =O and lf(B)I :::; c for ()E [-1r, 1r] -D (Halmos, 1958, p. 86). Obviously, if
f is essentially bounded the set where f is not finite has null measure.
Remark 4. lf c E L2([-7r, 1r], C) and !c(B)i2 is essentially bounded, then, since the entries
of ~~ have finite integrai, the variance of !::_(L)Xnt is finite. In particular,

vVe will invoke the following two results, the first known as the Lebesgue dominated
convergence theorem.
Fact L 1 • Assume that Un, n E N} is a sequence of integrable functions (i.e. having
finite integrai) defined on [-1r, 1r], such that (a) limn fn(B) f(B) a.e. in [-1r, 1r], and
(b) lfn(B)I :::; g(B) a.e. in [-1r, 1r], where g is non-negative and integrable. Then f is
integrable and

(see Apostol, 1974, p. 270).

li ,;n;~: j n ( B)d() = I: J(B)d()

Faet L 2 . Suppose that {fn, n E N} is a sequence of integrable functions de fin ed on [-1r, n],
that f is cW integrable function defined on [-n, 1r], an d that

or

Then there exists an increasing sequence Sn such that limn fs,. (B)= j(B) a.e. in [-1r, 1r] (see
Apostol, 1974, p. 298; Halmos, 1958, p. 103, Theorem A, p. 93, Theorem D, p. 89, Theorem
B).
Theorem l. x is idiosyncratic if and only if Xf is essentially bounded.
Proof. Let {an(L), n E N} be a DAS. By Fact M1 (Appendix),

lla(L)nxsntll
2
=I: a~(B)~~JB)a~(B)d() :S: I: À~" 1 (B)Ia~(B)I 2 d() :S: I: Àf(B)Ia~(B)I 2 dB.
(3)

8
[f Xf
is essentially bounded, the RHS of (3) tends to zero, so that x is idiosyncratic.
Conversely, assume that Àf is not essentially bounded. This means that for any positive
integer n, there exists an integer Sn such that

!-L n = L ( {e : À ~" 1 (e) ~ n}) > O.

Define hn by
h (B)= { 1/ffn if À~" 1 (B) ~n
n o otherwise,
and Hn = J::.11' À~n 1 (B)hn(B) 2 dB, so that Fn ~n. Then define bn(L) = lln(L)p_;n 1 (L)j~.
Clearly bn(L) is a DAS, while llbn(L)xsntll 2 =l, so that x is not idiosyncratic. QED
Corollary. Tf x is idiosyncratic then

Proof. Since Àf is essentially bounded, we have J::.11' Àf(B)de < oo. À~ 1 converges a.e. in
[ -7r, 1T l to Xf an d is bounded a.e. in [-7r, 1T l by Àf. Applying Fact L1,

QED
The following example shows that the converse of the Corollary is false.
Example 2. Assume that Xit is orthogonal to Xjt-k for any k and any i 1- j, and suppose
that the spectral density of the stationary process Xit is IBla, for lBI > 1/i, zero other-
wise, with - l < a < O. Jn this case the matrix :E~ is diagonal, Àf(B) = IBla for e 1- O,
zero for e = O, which is not essentially bounded. Thus x is not idiosyncratic, even though
supn J::.11' À~ 1 (B)dB = J::.11' !Biade< oo. ·
Definition 8. Assume that x fulfills Assumption l. Consider the orthogonal projection

(4)

Decomposition ( 4) will be called the canonica! decomposition of x.

4. A Finite Number of Dynamic Common Factors

4.1 Let us now give a formal definition of the generalized dynamic factor mode] and now
state our main results.
Definition 9. Let q be a non-negative integer. The double sequence x is a q-dynamic
factor sequence, q-DFS henceforth, if L2 (P, C) contains an orthonormal q-dimensionai
white-noise vector process

l i = {( U]t U2t uqt)', t E Z} = { uil t E Z},

and a double sequence ç= {çit, i E N, t E Z} fulfilling Assumption l, such that:

9
 (i) for any i E N,

Xit = Xit + çit

(5)
Xit = bil(L)ult + bi2(L)u2t + · · · + biq(L)uqt = bi(L)ut,

where bi E L2([-1r, 1r],Cq);

(ii) À1 is essentially bounded, i.e. ç is idiosyncratic;
(iii) putting x= {Xit, i E N, t E Z}, À~(B) = oo a.e. in [-1r, 1r].
The double sequences x and ç are referred to as the common and the idiosyncratic component
of representation (5).
Theorem 2. The double sequence x is a q-DFS if and only if:
(I) À~+l is essentially bounded;
(Ir) À~ = oo a.e. in [-1r, 1r].
Remark 5. Forni, Hallin, Lippi and Reichlin (1998) propose a heuristic criterion to determine
in empirical cases the number q such that (1) and (II) hold. Since they only rely on the 'only
if' part of Theorem 2, their criterion provides evidence on the number of common factors,
under the assumption of a generalized dynamic factor model. Once the 'if' part is proved,
evidence that far some q (I) and (II) hold becomes evidence both that the series follow a
generalized clynamic factors, ancl that the number of factors is q.
Theorem 3. lf x is a q-DFS with representation (5) then

span(x) = span(u) = Q(x).

Nioreover
Xit = proj(Xitl9(x)). (6)

An immediate but very important consequence of (6) is that if x is a q-DFS then the
components Xit and çit are uniquely determined. Precisely:
Theorem 4. Suppose that x is a q-DFS with representation (5). Suppose further that there
exists an s-dimensional orthonormal white-noise vector process v, with Vjt E L2(P, C), such
that
Xit = Wit + (it
Wit = Ci(L)vt,
where ci E L2([-1r, 1r], C 8 ), and that ,.\f and X~ fulfill, respectively, conditions (ii) and (iii)
of Definition 9. Then s =q, Wit = Xit and Ct = f.it·
Remark 6. Tt must be pointed aut that the components are identified, not Ut or the filters
bi(L). H (5) holds, and C(L) is q x q and such that C 0 (B)C 0 (B) = lq, then Xit = br(L)u;,
with bi(L) = bi(L)C(L) and u; = C(L- 1 )ut.
Remark 7. Note that in Definition 9 the filters bij(L) are in general bilateral. If repre-
sentation (5) must have a structural interpretation then it is reasonable to assume that the
filters bij(L) are one-sided. However, one-sidedness of the bij(L) has no consequences on the
eigenvalues Ànj, nor fulfillment of conditions (I) and (II) has implications on the existence
of one-sidecl representations of the common component. In this paper we cleal only with

lO
the number of common shocks, i.e. the dimension of Ut, which is identified (Theorems 2, 3,
4), an d with the reconstruction of Xi t an d E,i t (Theorem 5). Existence an d identification of
one-sided representations of the common component are left to further study.
Remark 8. The result in Theorem 4 can be restated by saying that if x is q-DFS, then
q is minimal, i.e. no representation fulfilling Definition 9 is possible with a smaller number
of factors. [t is important to point out that condition (iii) in Definition 9 is crucial. For
example, suppose that
Xi t = biUt + f,it,
with ç idiosyncratic and 2:::: l bi 12 < oo. In this case À} < oo. As a consequence, biUt +E,i t is
idiosyncratic, so that a representation with zero factor is possible.

Remark 9. Suppose that Xnt is a vector white noise for any n, so that the model is
"isomorphic" to the static model in Chamberlain and Rothschild (1983). Tben the eigenvalues
À~j are constant as functions of e. As a consequence, if À~ < oo, the model has q factors, with
q < s. Unfortunately, in the generai dynamic case, there exist cases where À~ is essentially
bounded, but the sequence does not fulfill Definition 9 for any q < s. Consider

with ç idiosyncratic and

bo (B) = { l if e E [-l, l]
O otherwise.
In this case ÀH B) is essentially bounded, but X[ (B) is infinite for e E [ -1, l], finite elsewhere.
1-lowever, such cases do not seem to deserve further consideration.
The proof of Theorems 2 and 3 will require severa] steps. In Section 4.2 we introduce an
additional assumption on x and show that it does not imply any loss of generality. In Section
4.3 we prove that conditions (I) and (II) are necessary for a q-DFS, which is relatively easy.
The converse is much more complicateci. In 4.4 we prove that Q(x) contains a q-dimensionai
orthonormal white-noise vector process z, so that Q(x) ~ span(z). ln 4.5 we prove that
actually Q(x) = span(z), so that the canonical decomposition has the form

Lastly, in 4.6 we show that 6 is idiosyncratic, thus completing the proof of Theorem 2. [n
4. 7 we prove Theorem 3.
4.2 Theorems 2 and 3 will be proved supposing that
Assumption 2. Far any n E N, j :s; n ande E [-Jr, Jr], À~j(B) 2': l.
To show that Assumption 2 does not imply any loss of generality, observe that, possibly
by embedding P into a larger probability space, we can assume that L2(P, C) contains a
stationary sequence {tit, i E N, t E Z} such that tit l_ X for any i and t, var(tit) = 1 for
any i and t, and tit l_ tjt-k for any t and i ;F j. Now define y = {xit + tit, i E N, t E Z},
and suppose that Theorems 2 and 3 have been proved under Assumption 2. We have:
(a) L:;{ = L:;+ In, x;j = À~j +l. Thus if conditions (f) and (II) hold for x, then they hold
for y as well. By Theorem 2 y is a q-DFS with representation Yit = Xit + ~it· By Theorem

11
3, Xit = proj(Yitl9(y)). But the definitions of ~ and y impiy that Xit proj(xitl9(x)).
Therefore
(7)
Since ~it is orthogonai to X and ~ - ~ is idiosyncratic, then (7) is a q-DFS representation.
Thus if (!) and (II) hoid for x, then x has a q-DFS representation.
(b) If x has the q-DFS representation Xit = Xit + é.it, then y has the q-DFS representation
Yit = Xit + (é.it + {,t)· Appiying Theorem 2 to y, we obtain conditions (I) and (II) for
À~ = À~ +l and À~+l = À~+l +l and therefore for À~ and À~+I· [n conclusion, if Theorems
2 and :3 hoid under Assumption 2, then Theorem 2 hoids in general.
(c) In the same way, appiying Theorems 2 and 3, supposedly proved under Assumption 2, to
y, Theorem 3 can be proved in generai.

4.3 Let us prove that if x is a q-DFS then (l) and (H) hoid. By Definition 9, :E~(B) =
:E~(B) + :E~(8). By Fact M 3 (Appendix), À~q(e) :::0:: À~q(8), so that (II) is proved. Moreover,
by Fact M3,
À~q+l (8):::; À~q+l (8) + )..;, 1 (8) = )..;, 1 (8), (8)
so that (I) is proved. Moreover, (8) impiies the following interesting inequaiity:

(9)

(the apposite inequality is proved in 4.7).

4.4 Now we start assuming (l) and (li). Firstly we prove that Q(x) contains a q-dimensionai
white-noise vector. The proof goes as follows. We start with a q- dimensionai orthonormai
white noise, call it '1/Jt, whose entries are Iinear combinations of the principal components of
Xmt, i.e. px .(L)Xmt, for j = l, ... ,q, t E Z. Then we project tPt on the space spanned
-mJ
by the principai components of Xnt, i.e. px .(L)Xnt, j = l, ... , q, t E Z, for n> m, call Yt
-nJ
tbe projection. We show that when m and n become Iarge the distance between tPt and Yt
becomes small. This leads to the construction of a sequence of q-dimensiona] white noise
vectors whose components are Cauchy sequences and converge to Q(x).
The proofs would be considerably easier if we could assume that À~q(8) :::0:: O:n a.e. m
[-1r, 1r], where limn O:n = oo. However, this condition is false in this 1-factor model:

Xit =(l- L)ut + é.it, (lO)

with :E$t = In, in which :E~ is continuous and :E~(O) = In for a11y n. Unfortunately, to
include cases like (lO) our proofs must be carried over piecewise 011 [-1r, 1r].
We need some further notation an d definitio11s. For n :::0:: q, we de11ote by P n the q x n
matrix
x 1 x l )l
( P~1
1
P n2 Pnq '

i.e. the matrix having the dy11amic eige11vectors p~j' j = l, ... , q, on the rows, a11d by Qn
the (n- q) x n matrix
x l x l x l )l
( Pnq+l Pnq+2 Pnn ·

Moreover, let us call An the q x q diagonal matrix havi11g on the diago11al the eige11values
À~j' j = 1, ... , q and by Pn the (n- q) x (n- q) diagonal matrix havi11g 011 the diago11al the

12
eigenvalues À~J' j =q+ l, ... , n. The matrices :E~ and In can be rewritten in their spectral
decomposition form:

:E~= PnAnPn + Qn<I>nQn

In= PnPn + QnQn. (11)

Since A;: 1 (B) is bounded in [-1r, 1r] by Assumption 2, the definition

n/, n
'f't = ( 1f.!lt
ln

makes sense and '1/J"t: is an orthonormal white noise. Note that the processes 1/Jjt, j = l, ... , q,
are the first q dynamic principal components of X 71 t, rescaled to get unit spectral density at
any frequency.
In the sequel it will be convenient to write matrix products AB in which the number
of columns of A is smaller than the number of rows of B. In this case we implicitly assume
that A has been augmented with columns of zeros to match the number of rows of B. For
example, we write P rn(L)Xnt for n> m, this meaning nothing other than P rn(L)Xrnt· In the
same way, we have equations with a l x m matrix on one side and a l x n matrix on the
other, with m < n, this meaning that the l x m matrix has been augmented with zeros.
Now let C be a q x q matrix such that the entries Cij belong to L2([-1r, 1r],C) andare
essentially bounded in modulus, so t ha t the linear combination C(L )'1/J",:' has finite variance-
covariance matrix (see Remark 4). We want to determine the (element by element) orthogonal
projection of the vector C(L)'I/Jf on the space

-({in ·-1 , ... ,q, t

span 1f.!]t' J- E '71})
tLJ

for n> m. From (ll) we get

- - - l/2 n -
Xnt = Pn(L)PrJL)Xnt + Qn(L)Qn(L)Xnt = Pn(L)An (L)'I/Jt + Qn(L)Qn(L)Xnt· (12)

Since Qn(B):E~(B)Pn(B) = <I>n(B)Qn(B)Pn(B) =O for any e, the two terms on the RHS of (12)
are orthogonal at any lead and lag element by element, so that the first is the projection of Xnt
on span( {1/Jjt, j = l, ... , q, t E Z}) and the second is the residual. The required projection
equation is then obtained by applying on both sides the operator C(L)A;;-/1 2 (L)P rn(L) and
noting that A~1 / 2 (L)P rn(L)xnt = A~1 / 2 (L)P rn(L)xrnt = 1/Jf, i.e.

(13)

where
(14)
Note that D, as well as ~,H and F, which are defined below, depend on C, m and n. How-
ever, as no confusion can arise, we do not explicit this dependence for notational simplicity.
The following result holds.
Lemma 5. Suppose that (I) and (II) hold. Assume n> m and Jet C( B) be a unitary matrix,
1.c. C(B)C(e) = Iq for any (}E [-1r, 1r]. Consider the projection equation

(15)

13
where D and Rare defined as in (14), and call J-L(O) the first eigenvalue ofthe spectral density
matrix of the residua] R(L )xnt· Then J-L( O) :::; À~q+l (0)/ À::'r,q (0).
Pro o f. The matrix In- Qn Qn is non-negative definite by (1]) a~d À~q+l Qn Qn- Qn P n Qn is
non-negative definite by the definition of P n, so that À~q+ 1 In- Qn P n Qn is also non-negative
definite. Premultiplying by CA;:;:,112 Pm and postmultiplying by PmA;;1112 è it is seen that

is also non-negative definite. The desired inequality follows from Fact l\lb (third and fourth
inequalit} ). QED
Now let us begin the construction of our converging sequence. Note that, under assump-
tions (l) and (rl), there exists a set II ç [-1r, 1r] and a real Hl such that [-1r, 1r] -TI has
null measure and, for e E TI: (l) À~q+ 1 (e):::; VV for any n E N and any e E II; (2) À~(e) =co
for e E TI. Obviously, ifa statement holds a.e. in II, then it holds a.e. in [-1r, 1r], and vice
versa.
Let ivf be a positive measure subset of II such that À~q(e) ;::: D'n for e E M, where
{D'n, n E N} is a rea] positive non-decreasing sequence satisfying limn D'n = oo. Lastly,
denote by KM the set including all of the q x q matrices C with elements in L2([-1r, 1r], C)
such that (i) C(e) =O for e tJ_ M, (ii) C(O) is unitary, i.e. C(O)C(e) = Iq, for e E M.
Consider (13) and assume C E KM. Taking the spectral density of both sides we get,
forO E M,
(16)
Applying Lemma 5 we obtain J-L(e):::; À~q+l(O)/À::'r,q(e) < vV/am for e E M. Hence by Fact
M3 , calling 6. 1 (0), j =l, ... ,q, the eigenvalues of D(e)D(O) in descending order, we have

(17)

for any e in M. Thus, if m* is such that

vVfam• < 1,

we have
(18)
everywhere in l'VI for any m;::: m*.
Now assume m> m*. Denote by~ the diagona.l matrix having Lij in place (j,j) and
e
by H(O) a matrix which is measurable in M and fulfills for any E M: (a) H(O)H(O) = Iq,
(b) H(e)~(O)H(O) = D(O)D(O). Inequa.lity (18) ensures that 1/ J 6. 1 (0) is bounded in M
for j = l , ... , q, so that the definition

F(O) = { H(O)~(e)- 1 1 2 H(O)D(O) ife E M (19)

o ife tJ- M
makes sense. Note tha.t F belongs to KM.
Lemma 6. Suppose tha.t (T) and (IT) hold. Let M be a positive measure subset of I1 and
{D'n, n E N} a rea] positive non-decreasing sequence such that limn D'n = oo. Assume that

14
(a) C E KM;
(b) À~q(B) 2: an for e E M;
Then, given T, such that 2 >T> o, there exists an integer mT such that, firstly, vVjmT < l,
and, secondly, for n > m 2: m 7 , the first eigenvalue of the spectral density matrix of

C(L)'If;'('- F(L)'If;f:

is less than T for any e E n, where F is defined as in (19), with D defined as in (14).
Proof. From (13) we get

C(L)'If;'('- F(L)'Ij;f: = R(L)xnt + (D(L)- F(L)) '1/Jf:.

The terms on the RHS are orthogonal at any lead and lag, so that the spectral density matrix
of the sum is equal to the sum of the spectral density matrices. Hence, calling S the spectral
density matrix on the LHS and using (16), we see that, for e E .M,

s= 2Iq- DF- FD = 2Iq - 2H~ l/ 2 :fr = 2H(Iq - ~ l/ 2 )H,

whose larger eigenvalue is 2- 2Jl::.q(B), which is less than 2Hf/am by (17). Thus, in order
for F to make sense and the statement of the lemma to hold we need 2Hf/am,. < min(2,T).
Since T < 2, m 7 must fulfill
(20)
QED
We need the following result, whose proof is given in the Appendix. Given the costa-
tionary processes A= {At, t E Z}, and B = {Bt, t E Z} we denote by S(A, B; B) the value
a t the frequency e of the cross spectrum between A and B.
Lemma 7. ff A = {Ant, t E Z} and B = {Bnt, t E Z} are costationary for n E N,
limn Ant = At and limn Bnt = Bt (in variance), then, for a sequence of integers si,

limS(Asi, Bs,; B) = S(A, B; B),

"
a.e. in [-1f, 7r].
Lemma 8. Suppose that (l) and (II) hold and Jet M and {an, n E N} be as in Lemma 6.
There exists a q-dimensionai vectar process v such that
(a) Vjt is an aggregate for j = l, ... , q;
(b) the spectral density matrix ofv equals Iq far e a.e. in lVI, zero far e <f- M.
Proof. Let F1 be any element of KM. Set T= l/2 3 1f and SJ = m 7 , where m 7 satisfies (20).
Then set G1(L) = F 1 (L)A:;11/ 2P 81 (L) and vi= GI(L)Xnt· lt is easily seen that the spectral
density matrix of vJ equals Iq for e E M, zero for e <f- M.
Now set T = l/2 5 1f and s 2 = mn where m 7 satisfies (20). Then determine D as in
(14), with F1 in place of C, s2 in place of n and F2 as in (19). Finally set G2(L)
F 2 (L)A:;21/ 2 P 82 (L) and vr
= G2(L)xnt· The spectral density matrix of equals lq forvr
e E M, zero for e <1--M. Moreover, by the definition of S] and Lemma 6, calling Al the first
eigenvalue of the spectral density matrix of vJ -v[, we have A1 (B) < l/2 3 7r for any e E TI,
so that llv]t- v]tll < 1/2, for j =l, ... , q.

15
 By recursion, set T= 1/2 2 k+ 1 7r and sk = m 7 , where m 7 satisfies (20). Then determine
D as in (14), with Fk-l in place of C and sk in place of n, and Fk as in (19). Finally set
Gk(L) = Fk(L)A,;-k112 P 8 k(L) and vf = Gk(L)Xnt· The spectral density matrix ofvf equals
Iq for e E M, zero for e rt. M. Moreover, by the definition of Sk-1 and Lemma 6, calling Ak-]
the first eigenvalue of the spectral density matrix of v~-l - vf, we have Ak-l (e) < l/2 2 k-l7r
for any e E TI, so that ilvJt-l- vjtli < 1/2k-l for j =l, ... , q.
Since we have

then each component of {vf, k E N} is a Cauchy sequence. Call V t the vector of the limits.
To prove (a), we have to show that each row of {Gn(L), n E N} is a DAS. We have

whose diagonal entries cannot be larger than 1//\~"q(e) by Fact M 1 , since Fn(e) E KM. The
latter ratio converges to zero a. e. in [-7r, 1r] an d is less than l by Assumption 2, so that its
integrai on [-1r, 1r] converges to zero by Fact 1 1 .
Finally, (b) follows from Lemma 7 an d the fact t hat the spectral density matrix of vf
equals Iq for e E M, zero for e rf. M. QED
Lemma 9. Suppose that (I) and (II) hold. There exists a q-dimensionai orthonormal white-
noise vector process z such that Zjt is an aggregate far j =l, ... , q.
Proof. Defìne v 1 as the smallest among the integers m such that the measure of

.c({e E TI, >.~q(e) >l});:::: 1r

an d

By recursion define Va, a E N, as the smallest among the integers m such that

L:({e E Ma-I, À~q(e) >a}) 2:: 1r

an d

The rneasure of the set

N1 = M1 n M2 n · · · n lvia n · · ·
is not Jess than 1r. Now define N2 starting with II- N1 and using L:(II- Nl)/2 instead of 1r,
Na starting with TI- N1 - N2- · · ·- Na-1 and using L:(II- N1 - N2- · · ·- Na-l)/2. We
h ave
II = N1 U N2 u · · · uNa U · · ·
an d
27r = L:(N1) + L:(N2) + · · · + .C(Na) + · · ·.
Lemma 8 can be applied to the subset Na, with the sequence an suitably defined. We
obtain a q-dimensionai vector vf = ( vft v2t v~t )' such that (i) vjt is an aggregate
for j = 1, ... , q; (ii) its spectral density matrix is Iq a.e. in N a, zero for e rf. Na. Now set

16
 Zt = 2.:~ 1 vf. lt is easily seen that the spectral density matrix of Zt is Iq a.e. in [-1r, 1r], so
that z is a q-dimensiona! orthonormal white noise process. QED
4.5 We now prove that the space spanned by z is Q(x).
Let Yt be an aggregate. Consider the projection

Yt = proj(yt[span(z)) + rt.

We want to show that rt is necessarily zero. Consider the (q+ 1)-dimensional vector process
( Zt rt ). lts spectral density, call it W, is diagonal with Iq in the q x q upper-left submatrix,
so that
det W( B) = S(rt, rt; B).
Since Zjt and rt belong to Q(x), let {anj(L), n E N}, for j =l, ... ,q+ 1 be DAS's such
that
limanj(L)xs,J = Zjt, for j = l, ... ,q,
n

limanq+l(L)xsnt
n
= Tt.
Note that, possibly by augmenting the filters anj(L) with zeros, we can assume the same
sequence { Sn, n E N} for all j = l, ... ' q+ l. Moreover: (l) r:.7l" [a~j(e)[ 2 de converges to
zero for j = l, ... , q+ l, so that a subsequence of a~j converges to zero a.e. in [-1r, 1r] (Fact
L2); (2) calling Zn the spectral density matrix of the vector process

a. subsequence of Zn converges to W a.e. in [-1r, 1r] (Lemma 7). Thus, with no loss of
generality we can assume that a~j converges to zero and Zn converges to W a.e. in [-1r, 1r].
Now, for j =l, ... , q+ l, set fnj = a~jPsn and gnj = a~j- fnjPs"' so that

an d

Sin ce a~j converges t o zero a.e. in [-1r, 1r], then gnj converges t o zero a.e. m [-1r, 1r ].
l'vioreover, the definition of gnj and fnj implies that

is the orthogonal projection of the LHS on the space spanned by p~"k(L )xsnt, for k = l, ... , q
and t E Z. As a consequence, the spectral density matrix Zn is equa! to the spectral density
matrix of

call it z~, plus the spectral density matrix of

17
 N ow o bserve firstly t hat z;;_ is singular for any (). Secondly, sin ce gnj ( ()) is orthogonal
to p~nk(()), for k =l, ... , q, by Fact M1 (Appendix),

Essential boundedness of À~+l along with convergence to zero a.e. of gnj imply that Z~
converges to zero a.e. in [-1r, 1r]. This implies that det Zn converges to zero a.e. in [-1r, 1r]
and therefore that det W(()) = S(rt, rt; ())=O a.e. in [-1r, 1r], so that rt =O.
4.6 So far we have proved that if (I) and (li) hold then

Xit = /it + bit

lit = proj(xitl9(x)) = ci(L)zt,

where z is a q-dimensionai orthonormal white noise, and ci E L~([-1r, 1r],C). Suppose that
8 is idiosyncratic. By Fact M 3 , À~q(()) ~ À~q(())- À~ 1 (()), so that ,\J(()) = oo a.e. in [-1r, 1r].
Thus, to complete the proof of Theorem 2 we must only show that 8 is idiosyncratic.
vVe need some additional preliminary results. Suppose that v = {V t, t E Z} and
w = {W t, t E Z} are orthonormal q-dimensionai white-noise vectors whose components
belong to L2(P, C). Moreover, suppose that v and w are costationary, i.e. E(v{Wt-k) does
not depend on t, so that we can use the notation rkw = E(vtWt-k)· Setting
(X)

A(L) = L rrv Lk,

k=-=

it is easily seen that A(L)wt is the orthogonal projection of V ton the process w. Moreover,
À(F)vt, where F = L -1, is the orthogonal projection of W ton the process v. Lastly, consider
the matrix A( cie). Its (i, j) entry is the cross spectrum between Vit and Wjt and has therefore
modulus bounded by 1/27r for any ()E [-1r, 1r].
Definition 10. For n= l, 2, ... , oo, let Vn= {vnt, t E Z} be a sequence of q-dimensionai
orthonormal white-noise vectors. Assume that Vn and Vm are costationary for all n and m.
Consider the orthogonal projection

(21)

an d le t vnm be the spectral density of p~n. The sequence {v n, n E N} generates a Cauchy

sequence of spaces if, given E> O, for () a.e. in [-1r, 1r] there exists an integer mE(()) such
that for m> mE(()), trace(vmn(e)) <E.
Remark 10. Note that, if Vnt converges, it generates a Cauchy sequence of spaces, whereas
the converse does not necessarily hold. As we shall show, the normalized principal components
'1/Jr generate a Cauchy sequence of spaces. However, they do not converge in generai: for
example, take q = l and assume that '1/Jr is a normalized principal component converging to
'1/Jt; then ( -l)n'I/Jr is also a normalized principal component which does not converge.
Lemma 10. Assume that {vn, n E N} generates a Cauchy sequence of spaces and let
y = {Yt, t E Z}, with Yt E L2(P, C), be costationary with Vn E L2(P, C) for any n. Consider
the orthogonal projections of Yt on the process Vn, i.e. Ynt = proj(Ytlspan(vn)). Then Ynt
converges in mean square to an element yt in L2(P, C).

18
Proof. We have
Yt = Ynt +Tnt= bn(L)Ynt +Tnt
Yt = Yrnt + Trnt = brn(L)Vrnt + Trnt,
where bn(L) and brn(L) are square summabie q-dimensionai fiiters, so that

The spectral density of the LHS is the cross spectrum between the LHS and the RHS. The
latter, due to the definition of Trnt and Tnt, is the sum of the cross spectrum between Tnt
and brn(L)Yrnt, call it 51, and the cross spectrum between Trnt and bn(L)vnt, call it 5 2 .
Using (21), 51 is the cross spectrum between Tnt and brn(L)Arnn(L)Ynt + brn(L)pfn, which
reduces to the cross spectrum between Tnt and brn(L)pfn, call it Crnn· Now observe that
both the spectrai density of Tnt and the entri es of brn( e-iO) are bounded in moduius by the
spectral density of Yt. Thus, since {v n, n E N} generates a Cauchy sequence of spaces, Cm n
converges to zero a.e. in [-1r, 1r] as m,n -----7 oo. The same argument hoids for 52, so that
the spectral density of Ynt - Ymt converges to zero a.e. in [-?r, 1r] as m, n -----7 oo. Since both
the spectral densities of Ynt and of Ymt are dominated by the spectrai density of Yt, by the
Lebesgue dominated convergence theorem (Fact LI), the integrai of the spectral density of
Ynt- Yrnt aiso converges to zero as m, n -----7 oo, so that Ynt is a Cauchy sequence. QED
Now let us go back to equation (12) and concentrate on a single line, i.e. the orthogonai
decomposition obtained by projecting Xit on the normalized principal components '1/Jjt, j =
1, ... , q. Calling 1rni(L) the i-th (q-dimensionai) row of Pn(L) and .9ni(L) the i-th row of
Q
-n
(L), we get

Lemma 11. The sequence {7./Jn, n E N} generates a Cauchy sequence of spaces.

Proof. For n:> m consider (15) for C(L) = Iq:

(22)

Calling vrnn the spectral density of pfn, convergence to zero of trace(vrnn(e)) for e a.e. m
[-1r, 1r] and n> mis a consequence of Lemma 5. On the other hand,

(23)

From (22) and (23) we get

By taking the trace on both sides and noting that the trace of D(ei 0 )D(e-i 0 ) is equal to the
trace of D(e-i 0 )D(ei 0 ) we get

Thus trace(Vrnn (e)) converges to zero for any diverging n and m. QED

19
 The following theorem, besides being useful to show that 6 is idiosyncratic, is important
per se, because of its implications for the estimation of common and idiosyncratic components
(see Forni, Hallin, Lippi and Reichlin, 1998).

Theorem 5. The sequence ofprojections 1it = 1rni(L)A~I 2 (L)'lj;J: = 1TnJL)P n(L)Xnt, n E N

converges in mean square to /it = proj(xitl9(x)), far any i.
Proof. By Lemmas 10 and 111ft converges in mean square to an element l!t in X. Therefore
the sequence of the residuals 8ft = Xit -1ft also converges to an element 87t in X. By Lemma
7, 87t must be orthogonal to i!t at all leads and lags. Moreover, i!t is an aggregate, since
1rni(L)Pn(L) is a DAS. To see this, consider that the spectral density of/ft, i.e. 1rinAnii"in,
is not larger than 1rniii"niÀ~q' and is bounded above by the spectral density of Xit, call it ai,
implying 1rni(B)ii"ni(e) ::=; ai(B)j>..~q(e). The latter ratio converges to zero a.e. in [-7r, 1r]
and is bounded above by ai(e) by Assumption 2, so that Fact L 1 applies. Summing up, 11t
belongs to <](x) and is orthogonal to 87t, so that i!t = /it· QED
The following Lemma concludes the proof of Theorem 2.
Lemma 12. 6 is idiosyncratic.
Proof. Let us fix m and denote by :E~ the spectral density matrix of the vector process
6rnt = ( c5lt 82t 8rnt )'. We want to show that the first eigenvalue of such matrix, i.e.
À~n 1 (B), cannot be larger t han su p n À~q+l (B) = >..~+ 1 (B) for any e E [ -1!', 7r ]. Le t :E~', n > m,
be the spectral density matrix of 6~t = ( 81t 87J:t 8~t )' and >..~'1 be its first eigenvalue.
By Theorem 5 8ft converges to 8it in mean square for i = l, ... , m, so that, by Lemma 7, a
subsequence of :E~' converges to :E~' a.e. in [-1r, 1r]. Assuming that limn :E~' = :E~ a.e.
in [-1!', 1T] avoids further complication in notation an d do es no t imply any loss of generality.
Continuity of the eigenvalues as functions of the matrix entries (Ahlfors, pp. 300-6; see also
the proof of Lemma l) implies that

(24)

a.e. in [-7r, 7r]. Moreover, note that :E~' is the m x m upper-left submatrix of :E~", so that,
by Fact M t,
an on
>..rnl (B)::=; >..nl (B) = >..~q+J (B)
f'or any n 2: m and any e in [-7r, 1r]. Hence by (24) À~ 1 (B) ::=; >..~+ 1 (B). Since this is true for
any m,
(25)
so that >..f is essentially bounded. The statement follows from Theorem l. QED
4. 7 Now we prove Theorem 3. Assume that x fulfills Definition 9, so that

Xit = Xit + f.it

Xit = bi(L)ut,

where u is q-dimensional. By Theorem 2, x has also the representation

Xit = lit + 8it

/it = proj(Xitl9(x)) = ci(L)zt,

20
where z is q-dimensionai and
span(z) = Q(x).
Since ç is idiosyncratic
Q(x) ç span(x),
and obviously
span(x) ç span(u).
On the other hand, since both u and z are q-dimensionai, then

span(z) = ç,x) = span(x) = span(u). (26)

Now, (26) impiies that Xit E Q(x) and ~it l_ Q(x), so that Xit = proj(xitl9(x)) and ~it = Oit·

Remark 11. Since we have proved that oit = ~it, (9) and (25) impiy that

a.e. in [-1r, 1r].

5. Non-stationary variables
The case of trend stationary or difference stationary variabies can be easiiy accommodated in
our model. Assuming that the nature of non-stationarity is correctiy detected, then, in the
first case, i.e. Xi t = Tt + Zit, where Tt is a deterministic trend, our results should be applied
to the stationary components Zit· In the second case, assume, for the sake of simplicity, that
the variabies Xit are 1(1). Consider the differences Yit = (1- L)xit and suppose that (I) and
(ll) hold for À.~+J and À.~ respectiveiy. Then we have the representation

(l- L)Xit = Xit + ~it

Xit = bi(L)ut,

where Ut is q-dimensionai and ç is idiosyncratic. Now observe that the vectors Xnt and
çnt are identified, and so are the spectral density matrices :E~ and :E~. Therefore all the
information necessary to determine whether the x's, or the ~'s, are 1(1) or I(O), and whether
cointegration relationships hold among the x's or the ~'s, can be recovered starting with the
spectral density matrices of the x's.

21
 REFERENCES

Ahlfors, L. V. (1987), Complex Analysis, Sidney: McGraw-Hill.

Apostol, T. M. (1974), Mathematical Analysis, Reading, MA: Addison Wesley.
Brillinger, D. R. (1981), Time Series Data Analysis and Theory, San Francisco: Holden Day.
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Econometrica 51, 1281-1304.
Chamberlain, G. and Rothschild, M. (l 983), "Arbitrage, factor structure and mean-variance
analysis in large asset markets", Econometrica 51, 1305-1324.
Forni, M., Hallin, M., Lippi, M. and Reichlin, L. (1998), "The generalized dynamic factor
model: identification and estimation," Materiali di Discussione del Dipartimento di
Economia Politica, Modena.
Forni, M. and Lippi, M. (1997), Aggregation and the Microjoundations of Dynamic Macroe-
conomics, Oxford: Oxford University Press.
Forni, M. and Reichlin, L. (1996), "Dynamic common factors in large cross-sections", Em-
pirical Economics 21, 27-42.
Forni, l'vf. and Reichlin, L. (1998), "Let's get real: a factor analytic approach to disaggregateci
business cycle dynamics", Review of Economie Studies, 65, 453-473.
Geweke, J. (1977), "The dynamic factor analysis of economie time series", in D.J. Aigner and
A.S. Golberger (eds.) Latent Variables in Socio-Economie Models, Ch. 19, Amsterdam:
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Halmos, P. R. (1958), Measure Theory, Princeton: Van Nostrand.
Rozanov, Yu. A. (1967), Stationary Random Processes, San Francisco: Holden Day.
Sargent, T.J. and Sims, C. A. (1977), "Business cycle modelling without pretending to have
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Stock, J.H. and Watson, M.H. (1998), "Diffusion indexes", Manuscript.

22
 Appendix
Proof of Lemma l. Since the leading coefficient of the characteristic polynomial of I;~
never vanishes, the eigenvalues, as functions of the entries of I:~, are continuous. Precisely,
let M be the range of the function cp: [-1r, 1r] r--> cnxn that associates I:~(B) with e. There
exist n functions 5j : M r--> JR, t hat are continuous in M and such t hat 5j (cp( B)) is a root
of the characteristic equation of I:~(B) (see Ahlfors, 1987, pp. 300-6). Now, consider the
function v1 : M r--> lR defined as

Obviously >..~ 1 (B)= v1 (cp(B)). By a standard argument v1 is continuous on M. Measurability

of cp (see Assumption l) ensures measurability of >..~ 1 . Now let k(l, p,) be the integer such
that 5k(l,JL)(J.t) = v1(p,). Define
max 5j(J.t).
v2(p,) = J=l,n
j,Ok(l ,J")

Obviously >..~ 2 (B) = v2(cp(B)) and the argument used for the first eigenvalue applies. Itera-
tively we obtain that all the eigenvalues >..~j are measurable. QED

Proof of Lemma 2. Let y = ( Yl Y2 Yn )' be an n-dimensionai stochastic vector

with variance-covariance matrix I:. Let Àk be the k-th eigenvalue of I:, in descending order,
and Pk an eigenvector of I: associated with Àk. We recall that:
Fact M 1 • For k =l, ... , n, >..k is

max llbYII 2 = max bi:b

b b

s.t. bE Cn, lbl =l, b _L Pj for j < k.

Moreover, if b = Pk, then the orthogonality conditian is fulfilled an d IIPkYII 2 = >..k (see ???).
Fact M2. For k =l, ... ,n, Jet è be any (k-1)-tuple {cj, j =l, ... ,k-1}, where Cj E cn.
The eigenvalue Àk is
minmax bi:b
é b

S. t. lbi = 1, b j_ Cj, j = } , ... , k- 1

(see Brillinger, 1981, p. 84, Exercise 3.10.16).

Going back to the proof, using Fact M1 the statement of Lemma 2 is trivial for k = l.
For k > l consider:

min max bi:~+l (B)b

é b
(27)
s. t. (1) lbl = l, b _L Cj, j = l, ... , k- l; (H) the last component of bis zero.

Trivially, the value of (27) cannot exceed >..~+lk(B), as obtained using Fact M 2. On the
other hand, the constraint on the last component of b implies that if b _L Cj then b is also
orthogonal to the k- l vectors of c n whose components are the first n components of Cj, for
j = l, ... , k- l. Thus the value of (27) is >..~k(e). QED
The following is a useful consequence of Fact M2.

23
Fact M3. Let DandE be m x m Hermitian non-negative definite, and F =D+ E. Then

)/s >,\e
- s

for any s = l, ... , m.

Proof. For the first inequality observe that, calling Vs the set of all vectors b E cm such
that fbf =l and b j_ Cj, where Cj, j =l, ... , S- l, is a given (s -l)-tuple of vectors in Cm,

Then take the minimum over all (s- 1)-tuples. The second inequality follows in the same
way. The second and third are trivial. QED
Proof of Lemma 3. Le t S 1 (e) = In,\~ 1 (O) - :E~ (O) an d consider the system of equations

(28)

with b(O) = (b 1 (0) b2 (0) bn(O)). The subset of [-1r, 1r] where rank(S 1 (0)) =O, call
it !VIa, is measurable, possibly empty. In Mo put p~ 1 (O) = ( 1 1 l)/ fo. Let M 1 be
the measurable subset of [-1r, 1r] where rank(S 1 (0)) = l. Then let Ml be the measurable
subset of !Vh where S? 1 (O) i= O. Put b2 (0) = 1, bj(e) =O for j > 2, then obtain the unique
solution for b1 (0), i.e. h (O) = Si 1 (0)/ Su (0). Putting p~ 1 (O) = b(O)/fb(O)f in M.f we have a
measurable function in M.f (notice that the choice -b(O)/fb(O)f would be also valid). Now
consider the subset of lVh -M{ where S§ 2 (0) i= O, and repeat the construction by taking
b1 (e) = 1, b:i (O) O for j > 2. It is clear how to proceed to cover M 1 . Then consider
1Vf2, the set where rank(S 1 (O)) = 2, and so on unti! Mn- 1 , the subset of [-1r, 1r] where
rank(S 1 (O)) = n- 1. Define the subset Mf- 1 as that in which the top-left submatrix of
arder n- l of S 1 (0) is non singular. Put bn(O) = l in Mf- 1 and find the unique solution
to (28). Then again put p~ 1 (0) = b(O)/fb(O)f. Continuing in this way until Mn-l has
been covered we obtain a measurable function for p~ 1 defined on [-1r, 1r]. Now consider
S 2 (0) = In,\~ 2 (0)- :E~ and the system

b(O)S 2 (0) =O
(29)
b(O)p~ 1 (O)= O.

The procedure above can be applied to (29) so that we obtain a measurable p~ 2 fulfilling (l)
and (2). lterating we reach the last step, when the system is

b(e)sn- 1 (0) =o
b(O)p~j(e) =O for j::; n- l.

QED

24
Proof of Lemma 7. We have

IS(An, Bn;e)- S(A, B; e) i

:; IS(An, Bn; e)- S(An, B; e) l+ IS(An, B; e)- S(A, B; e) i
= IS(An, Bn- B; e) l+ IS(An- A, B; e) l

:; jS(An,An;e)jS(Bn- B,Bn- E; e)+ jS(B,B;e)j(An- A,An- A; e)

:; [Js(A,A; e)+ jS(An- A,An- A; e)] jS(Bn- B,Bn- B; e)
+ jS(B, B; e)jS(An- A, An- A; e).

Since S(An- A, An- A; e) and S(Bn- B, Bn- B; e) converge to zero in the mean, by Fact
L2 there exists a sequence si such that S(As, -A, As.; -A; e) and S(Bs, - B, Es, - B; e)
converge to zero a.e. in [-?T, 7T]. QED
Fact S. lf Yt E X, t ben Yt has a spectral density.
Sketch of the proof. Let
n

Yt = li;;,n Lanj(L)Xjt, (30)

j=l

let fn be the spectral density of ~]= 1 anj(L)Xjt and 9nm the spectral density of

n m

j=l j=l

Equation (30) implies that 9nm converges to zero in mean as n and m tend to infinity. The
same argument employed in Lemma 7 leads to the conclusion that fn converges in the mean,
call f the limit. Proving that f actually is the spectral density of Yt is not difficult but rather
tiresome. The interested reader may request the proof from the authors.

25
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Maria Cristina Marcuzzo [1985] "Yoan Viole! Robinson (1903-
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capacità produttiva", pp. 30
79. Mario Forni [1990] "Una nota sull'errore di aggregazione", pp. 6
105. Giuseppe Marotta [ 1994] "Credi t view an d trade credi t: evidence
80. Francesca Bergamini [1991] "Alcune considerazioni sulle from Italy", pp. 20
soluzioni di un gioco bargaining", pp. 21
106. Margherita Russo [ 1994] "Uni t of investigati an for !oca! economie
81. Michele Grillo e Michele Polo [ 1991] "Politica] Exchange and the deve!opment policies", pp. 25
allocation ofsurplus: a Mode! of Two-party competition", pp. 34
107. Luigi Brighi [1995] "Monotoni city and the demand theory of the
82. Gian Paolo Caselli e Gabriele Pastrello [1991] "The 1990 Polish weak axioms", pp. 20
Recession: a Case ofTruncated Multiplier Process", pp. 26
108. Mario Forni e Lucrezia Reichlin [1995] "Modelling the impact of
83. Gian Paolo Caselli e Gabriele Pastrello [ 1991] "Polish firrns: technological change across sectors an dover ti me in manufàctoring".
Pricate Vices Pubblis Virtues", pp. 20 pp. 25

84 ~ebastiano Brusco e Sergio Paba [1991] "Connessioni, competenze 109. Marcello D'Amato and Barbara Pistoresi [1995] "Modelling wage
e capacità concorrenziale nell'industria della Sardegna", pp. 25 growth dynamics in ltaly: 1960-1990", pp. 38

Il O. Massimo Baldini [ 1995] "INDIMOD. Un modello di

microsimulazione per lo studio delle imposte indirette", pp. 37
 111. Paolo Bosi [1995] "Regionalismo fiscale e autonomia tributaria:
l'emersione di un modello di consenso", pp. 38
112 Massimo Baldini [ 1995] "Aggregation Factors and Aggregati an
Bias in Consumer Demand", pp. 33
113. Costanza Torricelli [1995] "Tbe information in the term structure of
interest rates. Can stocastic models help in resolving the puzzle?"
pp. 25
114. Margherita Russo [ 1995] "Industriai compi ex, pòle de
développement, distretto industriale. Alcune questioni sulle unità di
indagine nell'analisi dello sviluppo." pp. 45
115. AngelikaMoryson [1995] "50 Jahre Deutschland. 1945- 1995" pp.
21
116. Paolo Bosi [ 1995] "Un punto di vista macroeconomico sulle
caratteristiche di lungo periodo del nuovo sistema pensionistico
italiano." pp. 32
117. Gian Paolo Caselli e Salvatore Curatolo [1995] "Esistono relazioni
stimabili fra dimensione ed efficienza delle istituzioni e crescita
produttiva? Un esercizio nello spirito di D.C. North." pp. Il
118. Mario Forni e Marco Lippi [1995] "Permanent incarne,
heterogeneity and the errar correction mechanism." pp. 21
119. Barbara Pistoresi [1995] "Co-movements and convergence in
intemational output. A Dynamic Principal Components Analysis"
pp. 14
120. Mario Forni e Lucrezia Reichlin [ 1995] "Dynarnic common factors
in large cross-section" pp. 17
121. Giuseppe Marotta [1995] "Il credito commerciale in Italia: una nota
su alcuni aspetti strutturali e sulle implicazioni di politica monetaria"
pp. 20
122. Giovanni Bonifati [1995] "Progresso tecnico, concorrenza e
decisioni di investimento: una analisi delle determinanti di lungo
periodo degli investimenti" pp. 25
123. Giovanni Bonifati [ 1995] "Cambiamento tecnico e crescita
endogena: una valutazione critica delle ipotesi del modello di
Romer" pp. 21
124. Barbara Pistoresi e Marcello D'Amato [1995] "La riservatezza del
banchiere centrale è un bene o un male? ,Effetti dell'informazione
incompleta sul benessere in un modello di politica monetaria." pp. 32
125. Barbara Pistoresi [ 1995] "Radici unitarie e persistenza: l'analisi
univariata delle fluttuazioni economiche." pp. 33
126. Barbara Pistoresi e Marcello D'Amato [1995] "Co-movements in
European rea! outputs" pp. 20
127. Antonio Ribba [1996]"Ciclo economico, modello lineare-stocastico,
forma dello spettro delle variabili macroeconomiche" pp. 31
128. Carlo Alberto Magni [1996]"Repeatable and una tantum rea! options
a dynamic programming approach" pp. 23
129. Carlo Alberto Magni [1996] "Opzioni reali d'investimento e
interazione competitiva: programmazione dinamica stocastica in
optimal stopping" pp. 26
130 Carlo Alberto Magni [1996] "Vaghezza e logica fuzzy nella
valutazione di un'opzione reale" pp. 20
131. Giuseppe Marotta [1996] "Does trade credit redistribution thwart
monetary policy? Evidence from Italy" pp. 20
132. Mauro Dell'Amico e Marco Trubian [1996] "Almost-optimal
solution oflarge weighted equicut problems" pp. 30
133 Carlo Alberto Magni [1996]"Un esempio di investimento industriale
con interazione competitiva e avversione al rischio" pp. 20
134. Margherita Russo, Peter Borkey, Emilio Cube!, François Lévéque,
Francisco Mas [I 996] "L oca l sustainability an d competitiveness: the
case of the cerami c ti! e industry" pp. 66
135. Margherita Russo [ 1996] "Camionetta tecnico e relazioni tra
imprese" pp. 190
136. David Avra Lane, !rene Poli, Michele Lalla, Alberto Roverato
[ 1996] "Lezioni di probabilità e inferenza statistica" pp. 288
137. David Avra Lane, !rene Poli, Michele Lalla, Alberto Roverato
[1996]"Lezioni di probabilità e inferenza statistica- Esercizi svolti-
"pp. 302
138. Barbara Pistoresi [ 1996] "Is an Aggregate Errar Correction Mode l
Representative cf Disaggregate Behaviours? An exarnple" pp. 24
139. Luisa Malaguti e Costanza Torricelli [ 1996] "Monetary policy and
the term structure ofinterest rates", pp. 30
140. Mauro Dell'Amico, Martine Labbé, Francesco Maffioli [1996]
"Exact solution ofthe SONET Ring Loading Problem", pp. 20
141. Mauro Dell'Amico, R.J.M. Vaessens [1996] "Flow and open shop
scheduling on two machines with transportation times and machine-
independent processing times in NP-hard, pp. l O
142. M. Dell'Amico, F. Maffioli, A Sciomechen [1996] "A Lagrangean
Heuristic for the Pirze Collecting Travelling Salesman Prob1em", pp.
14
143. Massimo Baldini [1996] "Inequality Decomposition by Income
Sourceinltaly -1987 -1993", pp. 20
144. Graziella Bertocchi [1996] "Trade, Wages, and the Persistence of
Underdevelopment" pp. 20
145. Graziella Bertocchi and Fabio Canova [1996] "Did Colonization
matter for Growth? An Empirica! Exploration into the Historical
Causes of Africa's Underdevelopment" pp. 32
146. Paola Bertolini [1996] "La modemization de l'agricolture italienne et
le cas de l'Emilie Romagne" pp. 20
147. Emico Giovannetti [I 996] "Organisation industrielle et
développement !oca!: le cas de l' agroindutrie in Emilie Romagne"
pp. 18
148. Maria Elena Bontempi e Roberto Golinelli [ 1996] "Le determinanti
del leverage delle imprese: una applicazione empirica ai settori
industriali dell'economia italiana" pp. 31
149. Paola Bertolini [1996] "L'agriculture et la politique agricole
italienne face aux recents scenarios", pp. 20
150. Enrico Giovannetti [1996] "Il grado di utilizzo della capacità
produttiva come misura dei costi di transazione: una rilettura di
'Nature ofthe Firm' di R. Coase", pp. 75
151. Emico Giovannetti [1996] "Il ! 0 ciclo del Diploma Universitario
Economia e Amministrazione delle Imprese", pp. 25
152. Paola Bertolini, Emico Giovannetti, Giulia Santacaterina [1996] "Il
Settore del Verde Pubblico. Analisi della domanda e valutazione
economica dei benefici", pp. 35
153. Giovanni Solinas [1996] "Sistemi produttivi del Centro-Nord e del
Mezzogiorno. L'industria delle calzature", pp. 55
154. Tindara Addabbo [1996] "Married Women's Labour Supply in Italy
in a Regional Perspective", pp. 85
155. Paolo Silvestri, Giuseppe Catalano, Cristina Bevilacqua [1996] "Le
tasse universitarie e gli interventi per il diritto allo studio: la prima
fase di applicazione di una nuova normativa" pp. !59
156. Sebastiano Brusco, Paolo Bertassi, Margherita Russo [ 1996]
"L'industria dei rifiuti urbani in Italia", pp. 25
157. Paolo Silvestri, Giuseppe Catalano [1996] "Le nsorse del ststema
universitario italiano: finanziamento e governo" pp. 400
158. Carlo Alberto Magni [1996] "Un semplice modello di opzione di
differimento e di vendita in ambito discreto", pp. IO
159. Tito Pietra, Paolo Siconolfi [1996] "Fully Revealing Equilibna in
Sequential Economi es with Asset Market'" pp. 17
160. Tito Pietra, Paolo Siconolfi [1996] "Extrinsic Uncertainty and the
Informational Role of Prices" pp. 42
161. Paolo Bertella Farnetti [1996] "Il negro e il rosso. Un precedente non
esplorato dell'integrazione afroamericana negli Stati Uniti" pp. 26
162. Davi d Lane [ 1996] "Is what is go od for each best for ali? Learning
from others in the information contagi an mode!" pp. 18
 163. Antonio Ribba [1996] "A note on the equiva!ence of long-run and
short-run identifying restrictions in cointegrated systerns" pp. lO
164. Antonio Ribba [1996] "Scomposizioni permanenti-transitorie in
sistemi co integrati con tma applicazione a dati italiani" pp. 23
165 Mario Forni, Sergio Paba [ 1996] "Economie Growth, Soci al
Cohesion and Crime" pp. 20
166. Mario Forni, Lucrezia Reichlin [1996] "Let's get rea!: a factor
analytical approch to disaggregated business cycle dynamics" pp. 25
167 Marcello D'Amato e Barbara Pistoresi [1996] "So many Italies:
Statistica! Evidence on Regional Cohesion" pp. 31
168. Elena Bonfiglioli, Paolo Bosi, Stefano Toso [1996] "L'equità del
contributo straordinario per l'Europa" pp. 20
169. Graziella Bertocchi, Michael Spagat [ 1996] "Il ruolo dei licei e delle
scuole tecnico-professionali tra progresso tecnologico, conflitto
sociale e sviluppo economico" pp. 37
170. Gianna Boero, Costanza Torricelli [1997] "The Expectations
Hypothesis of the Term Structure of Interest Rates: Evidence for
Germany'' pp. 15
171. Mario Forni, Lucrezia Reichlin [ 1997] "National Poli ci es and Local
Economies: Europe and the US" pp. 22
172. Carlo Alberto Magni [1997] "La trappola del Roe e la
tridimensionalità del Van in un approccio sistemico", pp. 16
173 Mauro Dell'Amico [1997] "A Linear Time Algorithm for
Scheduling Outforests with Communication Delays on Two or Three
Processor"pp. 18
174. Paolo Bosi [1997] "Aumentare l'età pensionabile fa diminuire la
spesa pensionistica? Ancora sulle caratteristiche di lungo periodo
della riforma Dini" pp. 13
175 Paolo Bosi e Massimo Matteuzzi [ 1997] "Nuovi strumenti per
l'assistenza sociale" pp 31
176. Mauro Dell'Amico, Francesco Maffioli e Marco T rubi an [ 1997]
"New bounds for optium traffic assignment in satellite
communication" pp. 21
177. Carlo Alberto Magni [1997] "Paradossi, inverosimiglianze e
contraddizioni del V an: operazioni certe" pp. 9
178. Barbara Pistoresi e Marcello D'Amato [1997] "Persistence of
relative unemployment rates across italian regions" pp. 25
179. Margherita Russo, Franco Cavedani e Riccardo Pianesani [1997] "Le
spese ambientali dei Comuni in provincia di Modena, 1993-1995"
pp. 23
180 Gabriele Pastrello [ 1997] "T ime an d Equilibrium, Two Elisi ve
Guests in the Keynes-Hawtrey-Robertson Debate in the Thirties" pp.
25
181 LUisa Ma!aguti e Costanza Torricelli [1997] "The Interaction
Between Monetary Policy and the Expectation Hypothesis of the
Term Structure of Interest rates in a N-Period Rational Expectation
Mode!" pp. 27
182. Mauro Dell'Amico [ 1997] "On the Continuous Relaxation of
Packing Problems ~ Technical Note" pp.
183. Stefano Bordoni [ 1997] "Prova di Idoneità di Informatica Dispensa
Esercizi Excel 5" pp 49
184. Francesca Bergamini e Stefano Bordoni [ 1997] "Una verifica
empirica di un nuovo metodo di selezione ottima di portafoglio" pp.
22
185 Gian Paolo Caselli e Maurizio Battini [1997] "Following the tracks
of atkinson and micklewright the changing distribution of incarne
and earnings in poland from 1989 to l995".pp 21
186. Mauro Dell'Amico e Francesco Maffioli [1997] "Combining Linear
and Non-Linear Objectives in Spanning Tree Problerns" pp. 21
187 Gianni Ricci e V anessa Debbia [ 1997] "Una soluzione evolutiva in
un gioco differenziale di lotta di classe" pp.14
l 88 Fabio Canova e Eva Ortega [ 1997] "Testing Calibrated Generai
Equdibrium Mode!" pp 34
189. Fabio Canova [ 1997] "Does Detrending Matter !or the
Determinati an of the Reference Cycle and the Selection of Tuming
Points?" pp. 35
190. Fabio Canova e Gianni De Nicolò [1997] "The Equity Premium and
the Risk Free Rate: A Cross Country, Cross Maturity Examinatwn"
pp. 41
191. Fabio Canova e Angel J. Ubide [1997] "International Busmess
Cycles, Financial Market and Household Production" pp. 32
192. Fabio Canova e Gianni De Nicolò [1997] "Stock Returns, Term
Structure, Inflation and Rea! Activity: An International Perspective"
pp. 33
193. Fabio Canova e Morten Ravn [ 1997] "The Macroeconomic E!Tects
of German Unification: Rea! Adjustrnentsand the Welfare State" pp.
34
194. Fabio Canova [1997] "Detrending and Business Cycle Facts" pp. 40
195. Fabio Canova e Morten O. Ravn [ 1997] "Crossing the Rio Grande
Migrations, Business Cyc!e and the Welfare State" pp. 37
196. Fabio Canova e Jane Marrinan [1997] "Sources and PropagatiOn of
International Output Cycles: Common Shocks or Transmission?" pp
41
197. Fabio Canova e Albert Marcel [1997] "The Poor Stay Poor: Non-
Convergence Across Countries and Regions" pp. 44
198. Carlo Alberto Magni [1997] "Un Criterio Strutturalista per la
Valutazione di Investimenti" pp. 17
199. Stefano Bordoni [ 1997] "Elaborazione Automatica dei Dati" pp 60
200. Paolo Bertella Farnetti [ 1997] "The United States an d the Origins of
European Integration" pp. 19
201. Paolo Bosi [1997] "Sul Controllo Dinamico di un Sistema
Pensionistico a Ripartizione di Tipo Contributivo" pp 17
202. Paola Bertolini [1997] "European Union Agricu!tural Policy:
Problerns and Perspectives" p p 18
203. Stefano Bordoni [ 1997] "Supporti Informati ci per la Ricerca delle
soluzioni di Problemi Decisionali" pp30
204. Carlo Alberto Magni [ 1997] "Paradossi, lnverosimiglianze e
Contraddizioni del Van: Operazioni Aleatorie" ppl O
205. Carlo Alberto Magni [ 1997] "Tir, Roe e Van: Distorsioni
linguistiche e Cognitive nella Valutazione degli Investimenti" pp 17
206. Gisella Facchinetti, Roberto Ghise ili Ricci e Silvia Muzzioh [ 1997]
"New Methods For Ranking Triangular Fuzzy Numbers An
Investment Choice" pp 9
207. Mauro Dell'Amico e Silvano Martello [1997] "Reduction of the
Three-Partition Problem" p p 16
208. Carlo Alberto Magni [1997] "IRR, ROE and NPV: a Systemic
Approach" pp. 20
209. Mauro Dell'Amico, Andrea Lodi e Francesco MalTi oli [ 1997]
"Solution of the cumulative assigmnent prob!em with a well-
structured tabu search method" pp. 25
210. Carlo Alberto Magni [1997] "La definizione di investimento e
criterio del Tir ovvero: la realtà inventata" pp.16
211 Carlo Albero Magni [ 1997] "Critica alla de!ìmzione classica d1
investimento: un approccio sistemi co" pp 17
212. Alberto Roverato [1997] "Asymptotic prior to postenor analys1s for
graphical gaussian mode! s" pp. 8
213. Tindara Addabbo [1997] "Povertà nel 1995 analisi stati ca e dinamica
sui redditi familiari" pp 64
214. Gian Paolo Caselli e Franca Manghi [1997] "La transizwne da riano
a mercato e il modello di Ising" p p 15
215. Tindara Addabbo [ 1998] "Lavoro non pagato e reddito esteso
un'applicazione alle famiglie italiane in cui entrambi i coniugi sono
lavoratori dipendenti" pp 54
216 Tindara Addabbo [ 1998] "Probabilità di occupazione e aspettative 243. Gian Paolo Caselli [ 1998] The future of mass consumption soc1ety in
individuali" pp 36 the former planned economies: a macra approach pp 21

217. Lara Magnani [ 1998] "Transazioni, contratti e organizzazioni: una
chiave di lettura della teoria economica dell'organizzazione p p 39
218 Michele Lalla, Rosella Molinari e Maria Grazia Modena (1998] "La
progressione delle carriere: i percorsi in cardiologia" pp 46
219. Lara Magnani [1998] "L'organizzazione delle transazioni di
subfomitura nel distretto industriale" pp 40
244. Mario Forni, Mare Hallin, Marco Lippi e Lucrez1a Reichlin [1998]
"The generalized dynamic factor mode!: identification and
estimation pp 35.
245. Carlo Alberto Magni [1998] "Pictures, language and research: the
case offmance and financial mathematics" pp 35.
246. Luigi Brighi [1998] "Demand and generalized monotonicity" pp 21.

220. Antonio Ribba [1998] "Recursive V AR orderings and identification 247. Mario Forni e Lucrezia Reichlin [ 1998] "Risk an d potential
of permanent and transitory shocks" pp 12 insurance in Europe" pp 20.

221 Antonio Ribba (1998] "Granger-causality and exogeneity in 248. Tommaso Minerva, Sandra Paterlim e !rene Poli [ 1998] "A Genetic
cointegrated Var models" pp 5 Algorithm far predictive Neural Network Design (GANND). A
Financial Applicati an" pp 12.
222 Luigi Brighi e Marcello D'Amato [1998] "Optimal Procurement in
Multiproduct Monopoly" pp 25 249. Gian Paolo Caselli Maurizio Battini (1998] "The Changing
Distribution ofEarnings in Poland from 1989 to 1996 pp. 9.
223. Paolo Basi, Maria Cecilia Guerra e Paolo Silvestri [1998] "La spesa
sociale nel comune Modena" Rapporto intermedio pp 37 250. Mario Forni, Sergio Paba [1998] "Industria! Districts, Soc!al
Environment and Local Growth" Evidence from Italy pp. 27.
224 Mario Forni e Marco Lippi [1998] "On the Microfoundations of
Dynamic Macroeconomics" pp 22 251. Lara Magnani [1998] "Un'analisi del distretto industriale fondata
sulla moderna teoria economica dell'organizzazione" pp. 46.
2:25. Roberto Ghiselli Ricci [ 1998] "Nuove Proposte di Ordinamento di
Numeri Fuzzy.Una Applicazione ad un Problema di Finanziamento 252. Mario Forni, Lucrezia Reichlin [ 1998] "Federai Policies and Local
pp 7 Economies: Europe and the US" pp. 24

226. Tommaso Minerva [1998] "Internet Domande e Risposte" pp 183 253. Luigi Brighi [1998] "A Case of Optimal Regu!at10n whit
Multidimensional Private Information" pp 20
227. Tommaso Minerva [1998] "Elementi di Statistica Computazione.
Parte Prima: .Il Sistema Operativo Unix ed il Linguaggio C" pp. 57 254. Barbara Pistoresi, Stefania Luppi [1998] "Gli investimenti diretti
esteri nell'America Latina e nel Sud Est Asiatico: 1982-1995" pp 27
228. Tommaso Minerva and !rene Poli [1998] "A Gennetic Algorithms
Selection Method far Predictive Neural Nets and Linear Modenls" 255 PaolaMengoli, Margherita Russo [1998] "Technical and Vocational
pp. 60 Education and Training in ltaly: Structure and Changes at National
and Regional Leve!" pp 25.
229. Tommaso Minerva and !rene Poli [1998] "Building an ARMA
Mode! by using a Genetic Algorithm" pp. 60 256 Tindara Addabbo [1998] "On-the-Job Search a Microeconometnc
Analysis on !talian Data" pp. 29.
230 Mauro Dell'Amico e Paolo Toth [1998] "Algorithms and Codes far
Dense Assignment Problems: the State ofthe Art" pp 35 257 Lorenzo Bertucelli [ 1999] "Il paternalismo industriale: una
discussione storiografica" pp.21.
231. Ennio Cavazzuti e Nicoletta Pacchiarotti [1998] "How to play an
hotelling game in a square town" pp 12

232. Alberto Roverato e !rene Poli [1998] "Un algoritmo genetico per la
selezione di modelli grafici" pp Il

233 Marcello D'Amato e Barbara Pistoresi [ 1998] "Delegation of

Monetary Policy to a Centrai Bariker with Private Information" pp
15

234. Graziella Bertocchi e Michae! Spagat [ 1998] "The Evolution of

Modem Educational Systems. Technical vs. Genera! Education,
Distributional Conflict, and Growth" pp 31

235 Andrè Dumas [1998] "Le systeme monetaire Europeen" pp 24.

236 Gianna Boero, Gianluca Di Lorenzo e Costanza Torricelli [ 1998]

"The influence of short rate predictability and monetary policy on
tests ofthe expectations hypothesis: some comparative evidence" pp
30

237 Carlo Alberto Magni [1998] "A systemic rule far investment
decisìons: generalizations of the traditional DCF criteria and new
conceptions" pp 30

23~ Marcello D'Amato e Barbara Pistoresi [ 1998] "lnterest Rate Spreads

Between Italy and Germany: 1995-1997" pp 16

239. Paola Bertolini e Alberto Bertacchini [ 1998] "Il distretto di

lavorazioni carni suine in provincia di Modena" pp 29

240 Costanza Torricelli e Gianluca Di Lorenzo [1998] "Una nota sui

fondamenti matematico-finanziari della teoria delle aspettative della
struttura della scadenza" pp. 15

241 Christophe Croux, Mario Forni e Lucrezia Reichlin [1998] "A

Measure of Comovement far Economie Indicators: Theory and
Empirics"pp 23.

242. Carlo Alberto Magni [1998] "Note sparse sul dilemma del
pngioniero (e non solo) pp 13