Estimating common trends in multivariate time series using dynamic factor analysis

This paper discusses dynamic factor analysis, a technique for estimating common trends in multivariate time series. Unlike more common time series techniques such as spectral analysis and ARIMA models, dynamic factor analysis can analyse short, non-stationary time series containing missing values. Typically, the parameters in dynamic factor analysis are estimated by direct optimisation, which means that only small data sets can be analysed if computing time is not to become prohibitively long and the chances of obtaining sub-optimal estimates are to be avoided. This paper shows how the parameters of dynamic factor analysis can be estimated using the EM algorithm, allowing larger data sets to be analysed. The technique is illustrated on a marine environmental data set.