Before preforming principal component analysis to construct multidimensional index, can I transform variables into first-differenced form to make them stationary if some of these variables present unit root problem? Does anybody know how to perform Dynamic Principal Component Analysis using Stata? I really appreciate your help in advance.
Yes, you can transform variables into first-differenced form to address the unit root problem before performing PCA. However, remember that first-differencing may change the interpretation of the resulting principal components. As for Dynamic PCA in Stata, it's not a built-in feature. You may need to use a combination of time series techniques and traditional PCA, or explore user-written packages to achieve this.
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