The dynamic factor network model with an application to international trade

Falk Bräuning, Siem Jan Koopman*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

136 Downloads (Pure)

Abstract

We introduce a dynamic network model with probabilistic link functions that depend on stochastically time-varying parameters. We adopt a blockmodel framework and allow the high-dimensional vector of link probabilities to be a function of a low-dimensional set of dynamic factors. The resulting dynamic factor network model has a basic and transparent structure. However, parameter estimation, signal extraction of stochastic loadings and dynamic factors, and the econometric analysis generally are intricate tasks for which simulation-based methods are needed. We provide feasible and practical solutions to these challenging tasks, based on a computationally efficient importance sampling procedure to evaluate the likelihood function. An extensive Monte Carlo study demonstrates the performance of our method in finite samples, both under correct and incorrect model specifications. In an empirical study, we use the novel framework to analyze global patterns of banana exports and imports. We identify groups of heavy and light traders in this highly active commodity market and their time-varying trade probabilities.

Original languageEnglish
Pages (from-to)494-515
Number of pages22
JournalJournal of Econometrics
Volume216
Issue number2
Early online date30 Nov 2019
DOIs
Publication statusPublished - Jun 2020

Funding

We are grateful to Yacine Ait-Sahalia (the editor) and two anonymous referees for excellent comments and suggestions. We thank Kovid Puria and Botao Wu for valuable research assistance. S.J. Koopman acknowledges support from CREATES, the Center for Research in Econometric Analysis of Time Series (DNRF78) at Aarhus University, Denmark, funded by the Danish National Research Foundation. The views expressed in this paper do not necessarily reflect those of the Federal Reserve Bank of Boston or the Federal Reserve System.

Keywords

  • Blockmodels
  • Dynamic factor models
  • International trade
  • Network analysis

Fingerprint

Dive into the research topics of 'The dynamic factor network model with an application to international trade'. Together they form a unique fingerprint.

Cite this