Large-dimensional Factor Analysis with Weighted PCA

Zhongyuan Lyu; Ming Yuan

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arXiv · 2508.15675

Large-dimensional Factor Analysis with Weighted PCA

Zhongyuan Lyu·Ming Yuan

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Abstract

Principal component analysis (PCA) is arguably the most widely used approach for large-dimensional factor analysis. While it is effective when the factors are sufficiently strong, it can be inconsistent when the factors are weak and/or the noise has complex dependence structure. We argue that the inconsistency often stems from bias and introduce a general approach to restore consistency. Specifically, we propose a general weighting scheme for PCA and show that with a suitable choice of weighting matrices, it is possible to deduce consistent and asymptotic normal estimators under much weaker conditions than the usual PCA. While the optimal weight matrix may require knowledge about the factors and covariance of the idiosyncratic noise that are not known a priori, we develop an agnostic approach to adaptively choose from a large class of weighting matrices that can be viewed as PCA for weighted linear combinations of auto-covariances among the observations. Theoretical and numerical results demonstrate the merits of our methodology over the usual PCA and other recently developed techniques for large-dimensional approximate factor models.

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Zhongyuan Lyu, Ming Yuan. 2025-08-21. Large-dimensional Factor Analysis with Weighted PCA. https://arxiv.org/abs/2508.15675

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