A dynamic factor model of the evaluation of the financial crisis in Turkey.

Abstract

Factor analysis has been widely used in economics and finance in situations where a relatively large number of variables are believed to be driven by few common causes of variation. Dynamic factor analysis (DFA) which is a combination of factor and time series analysis, involves autocorrelation matrices calculated from multivariate time series. Dynamic factor models were traditionally used to construct economic indicators, macroeconomic analysis, business cycles and forecasting. In recent years, dynamic factor models have become more popular in empirical macroeconomics. They have more advantages than other methods in various respects. Factor models can for instance cope with many variables without running into scarce degrees of freedom problems often faced in regression-based analysis. In this study, a model which determines the effect of the global crisis on Turkey is proposed. The main aim of the paper is to analyze how several macroeconomic quantities show an alteration before the evolution of the crisis and to decide if a crisis can be forecasted or not.