Factor Models in Time Series with Applications in Macroeconomics and Finance

  • Methods Summer Programme
  • Department of Statistics
  • Application code ME411
  • Starting 2018

A graduate level course about “big data” analysis. It introduces methods and techniques for extracting meaningful and useful information from large panels of time series.

This course will next take place in 2018

Large datasets are becoming increasingly available to researchers and practitioners in many disciplines. In particular, during this “big data” revolution the analysis of high–dimensional time series has become one of the most active subjects of modern statistical methodology with applications in various areas of social science including finance, macroeconomics, and econometrics. Although the value of information is unquestionable, the possibility of extracting meaningful and useful information out of this large amount of data is also of great importance. To this end, several new analytical and computational techniques have been developed under the name of factor models.

The aim of this course is to give an introduction to factor models in time series analysis by teaching students the basic analytical methods and their applications to macroeconomics and finance via the use of Matlab software. These models are widely used in central banks for forecasting key macroeconomic indicators such as GDP and inflation. They are also used to study the impact of economic policies on economic activity and in validating models of the economy. Financial institutions adopt factor models for risk management.

This course is designed for postgraduates, academics and professionals with an interest in big data analysis and who have some analytical background in time series analysis.


August 2018

Dr Matteo Barigozzi, Department of Statistics

2018 Tuition Fees

Programme details

Key facts

August 2018

Lectures, practical classes

2-hour examination (optional)

LSE's Central London Campus



At least one semester of mathematical statistics with analytical treatment of estimation and inference, and at least one semester of multivariate calculus. Good background in methods of regression modelling and some basic familiarity with the analysis of multivariate time series.

Course outline

The course consists of five daily lectures of three hours each, supported by four afternoon computer-based practical classes lasting an hour and a half, which will allow course participants to implement the lecture material in Matlab.

The course covers the following topics:

  • Motivations: the availability of large panels of time series and the value of information in macroeconomics, finance and other disciplines.
  • Exact and approximate factor models: the curse and blessing of dimensionality. We start by discussing principal component analysis as a useful dimension reduction technique for large panels of time series. This is the most simple example of factor model (the static model) which we then generalize to include all temporal relations among the considered variables (the dynamic model).
  • Estimation of factor models: we compare different models and discuss their estimation. The basic tools of multivariate time series analysis will be introduced. 

We then apply these models to three main areas:

  • forecasting in real time of macroeconomics indicators such as Gross Domestic Product and Inflation
  • policy analysis problems, i.e. the study of the dynamic reaction of observed variables to unexpected changes in policies such as monetary policies
  • optimization of financial portfolios.

All topics are of particular relevance for and widely used by researchers in central banks and national or international institutions. Examples based on real-data applications and taken from existing papers are presented and discussed during lectures and some will be replicated during computer workshops.

Main texts
There is no main textbook for this course. Lecture notes and all necessary material will be provided. 

Software used
MATLAB. Some previous experience is desirable.

Teaching schedule
The following teaching schedule is indicative only, and is subject to change.


AM: Introduction and principal component analysis
PM: Computer class

AM: Static and dynamic factor models
PM: Computer class

AM: Estimation and Kalman filter
PM: Computer class

AM: Macroeconomics applications
PM: Computer class

AM: Finance applications
PM: Exam

A 2-hour final examination will take place on the Friday afternoon.

Please note: A full timetable will be provided at registration on the first day. The below schedule is subject to change.


 Morning lecture

 Afternoon class
















Course benefits

After successful completion of this course, participants should be able to:

  • identify macroeconomic and/or financial policy problems that can benefit from factor analysis and consequently identify the appropriate dataset and methodology to be used
  • extract and analyse relevant information from large datasets
  • apply the analytical tools of time series analysis to the data using Matlab software
  • conduct empirical research in time series, i.e. to interpret the information extracted from the data in a critical way also in relation to the existing literature
  • forecast time series using many predictors.


Matteo is a passionate and excellent teacher! His classes were among the best I have ever had in my career!
2016 Participant

Matteo really made the lectures very interesting. Practice sessions are also well organized!
2016 Participant

Matteo is an excellent professor, his classes were very dynamic and interesting.
2015 Participant

This course has provided me with a great experience and valuable knowledge. It is perfect for networking as well. Thank you for offering this course
2015 Participant

Matteo, your course was absolutely mind-blowing. Thank you!
2014 Participant

I would like to thank Matteo for some very inspiring and enlightening lectures. They were some of the best I have ever experienced.
2014 Participant

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