Detecting Granular Time Series in Large Panels

• Authors: Geert Mesters and Christian Brownlees.
• BSE Working Paper: 110465 | September 17
• Keywords: panel data , granularity , network models , factor models , industrial production , CDS spreads
• JEL codes: C33, C38
• panel data
• granularity
• network models
• factor models
• industrial production
• CDS spreads

Large economic and financial panels often contain time series that influence the entire cross-section. We name such series granular. In this paper we introduce a panel data model that allows to formalize the notion of granular time series. We then propose a methodology, which is inspired by the network literature in statistics and econometrics, to detect the set of granulars when such set is unknown. The influence of the i-th series in the panel is measured by the norm of the i-th column of the inverse covariance matrix. We show that a detection procedure based on the column norms allows to consistently select granular series when the cross-section and time series dimensions are large. Importantly, the methodology allows to consistently detect granulars also when the series in the panel are influenced by common factors. A simulation study shows that the proposed procedures perform satisfactorily in finite samples. Our empirical studies demonstrate, among other findings, the granular influence of the automobile sector in US industrial production.