Illuminating the factor and dependence structure in large panel models

This presentation will give an overview about how to estimate the number of common factors and how to test for cross-sectional dependence. It does so by presenting two community-contributed commands: xtnumfac and xtcd2. xtnumfac implements 10 different methods to estimate the number of factors, among them the popular methods by Bai and Ng (2002) and Ahn and Horenstein (2013). The degree of cross-section dependence is investigated using xtcd2. xtcd2 implements three different tests for cross-section dependence based on Pesaran (2015), Juodis and Reese (2021), and Pesaran and Xie (2021). The presentation includes a review of the theory, a discussion of the commands, and empirical examples.