Identification of Joint Distributions in Dependent Factor Models

This paper studies linear factor models that have arbitrarily dependent factors. Assuming that the coefficients are known and that their matrix representation satisfies rank conditions, we identify the nonparametric joint distribution of the unobserved factors using first and then second-order partial derivatives of the log characteristic function of the observed variables. In conjunction with these identification strategies the mean and variance of the vector of factors are identified. The main result provides necessary and sufficient conditions for identification of the joint distribution of the factors. In an illustrative example, we show identification of an earnings dynamics model with a subset of arbitrarily dependent income shocks. Closed-form formulas lead to estimators that converge uniformly and despite being based on inverse Fourier transforms have tight confidence bands around their theoretical counterparts in Monte Carlo simulations.