dfm-python 0.1.0__py3-none-any.whl

dfm_python/dfm.py

@@ -0,0 +1,2356 @@
+"""Dynamic Factor Model (DFM) estimation using EM algorithm."""
+
+import numpy as np
+from scipy.linalg import inv, pinv, block_diag
+from scipy.sparse.linalg import eigs
+from scipy.sparse import csc_matrix
+from dataclasses import dataclass
+from typing import Tuple, Optional, Any
+import warnings
+import logging
+
+from .kalman import run_kf
+from .config import DFMConfig
+
+# Import utility function (moved inline to avoid external dependency)
+try:
+    from scipy.interpolate import CubicSpline
+    from scipy.signal import lfilter
+    SCIPY_AVAILABLE = True
+except ImportError:
+    SCIPY_AVAILABLE = False
+
+def _rem_nans_spline(X: np.ndarray, method: int = 2, k: int = 3):
+    """Treat NaNs in dataset for DFM estimation (inline utility)."""
+    from scipy.interpolate import CubicSpline
+    from scipy.signal import lfilter
+    
+    T, N = X.shape
+    indNaN = np.isnan(X)
+    
+    def _remove_leading_trailing(threshold: float):
+        rem = np.sum(indNaN, axis=1) > (N * threshold if threshold < 1 else threshold)
+        nan_lead = np.cumsum(rem) == np.arange(1, T + 1)
+        nan_end = np.cumsum(rem[::-1]) == np.arange(1, T + 1)[::-1]
+        return ~(nan_lead | nan_end)
+    
+    def _fill_missing(x: np.ndarray, mask: np.ndarray):
+        non_nan = np.where(~mask)[0]
+        if len(non_nan) < 2:
+            return x
+        spline = CubicSpline(non_nan, x[non_nan], extrapolate=True)
+        x_filled = spline(np.arange(len(x)))
+        # Moving average filter
+        b = np.ones(k) / k
+        x_filled = lfilter(b, 1, x_filled)
+        return x_filled
+    
+    if method == 2:
+        keep = _remove_leading_trailing(0.5)
+        X_clean = X[keep, :].copy()
+        indNaN_clean = indNaN[keep, :]
+        
+        for i in range(N):
+            if np.any(indNaN_clean[:, i]):
+                X_clean[:, i] = _fill_missing(X_clean[:, i], indNaN_clean[:, i])
+        
+        return X_clean, keep
+    else:
+        return X, np.ones(T, dtype=bool)
+
+# Set up logger for fallback tracking (optional - only if logging is enabled)
+_logger = logging.getLogger(__name__)
+# Only configure if not already configured and if logging is enabled
+if not _logger.handlers:
+    # Check if logging is enabled at module level (avoid overhead if disabled)
+    root_logger = logging.getLogger()
+    if root_logger.level <= logging.WARNING:
+        _logger.setLevel(logging.WARNING)
+        handler = logging.StreamHandler()
+        handler.setFormatter(logging.Formatter(
+            '%(asctime)s - %(name)s - %(levelname)s - %(message)s',
+            datefmt='%Y-%m-%d %H:%M:%S'
+        ))
+        _logger.addHandler(handler)
+
+
+# Removed unused validation helpers - consolidated inline for simplicity
+
+
+def _validate_dfm_inputs(X: np.ndarray, config, threshold: float) -> None:
+    """Validate inputs for dfm() function.
+    
+    Parameters
+    ----------
+    X : np.ndarray
+        Data matrix (T x N)
+    config : DFMConfig
+        Model configuration
+    threshold : float
+        EM convergence threshold
+        
+    Raises
+    ------
+    ValueError
+        If inputs are invalid
+    """
+    # Check data is numpy array
+    if not isinstance(X, np.ndarray):
+        raise TypeError(f"X must be numpy.ndarray, got {type(X)}")
+    
+    # Check data dimensions
+    if X.ndim != 2:
+        raise ValueError(f"X must be 2D array, got shape {X.shape}")
+    
+    T, N = X.shape
+    if T < 10:
+        raise ValueError(f"Insufficient time periods: T={T}, need at least 10")
+    if N < 1:
+        raise ValueError(f"No series in data: N={N}")
+    
+    # Check config has required attributes
+    if not hasattr(config, 'Blocks'):
+        raise ValueError("config must have 'Blocks' attribute")
+    if not hasattr(config, 'Frequency'):
+        raise ValueError("config must have 'Frequency' attribute")
+    
+    # Check blocks shape matches data
+    blocks = config.Blocks
+    if blocks.ndim != 2 or blocks.shape[0] != N:
+        raise ValueError(f"Blocks shape {blocks.shape} doesn't match data N={N}")
+    
+    # Check threshold
+    if not isinstance(threshold, (int, float)) or threshold <= 0:
+        raise ValueError(f"threshold must be positive number, got {threshold}")
+    
+    # Check for excessive NaN/Inf
+    nan_count = np.sum(np.isnan(X))
+    inf_count = np.sum(np.isinf(X))
+    total_elements = X.size
+    nan_pct = nan_count / total_elements * 100 if total_elements > 0 else 0
+    
+    if nan_pct > 50:
+        warnings.warn(f"Warning: {nan_pct:.1f}% of data is NaN", UserWarning)
+    
+    if inf_count > 0:
+        raise ValueError(f"Data contains {inf_count} infinite values")
+    
+    # Check for constant series (zero variance)
+    finite_mask = np.isfinite(X)
+    for i in range(N):
+        series = X[:, i]
+        finite_series = series[finite_mask[:, i]]
+        if len(finite_series) > 1:
+            var_val = np.var(finite_series)
+            if var_val < 1e-10:
+                warnings.warn(f"Warning: Series {i} has near-zero variance ({var_val:.2e})", 
+                            UserWarning)
+
+
+def _validate_init_inputs(x: np.ndarray, r: np.ndarray, p: int, 
+                                     blocks: np.ndarray, nQ: int) -> None:
+    """Validate inputs for init_conditions() function.
+    
+    Parameters
+    ----------
+    x : np.ndarray
+        Standardized data (T x N)
+    r : np.ndarray
+        Number of common factors for each block
+    p : int
+        Number of lags in transition equation
+    blocks : np.ndarray
+        Block loading structure (N x n_blocks)
+    nQ : int
+        Number of quarterly variables
+        
+    Raises
+    ------
+    ValueError
+        If inputs are invalid
+    """
+    # Check data dimensions
+    if x.ndim != 2:
+        raise ValueError(f"x must be 2D array, got shape {x.shape}")
+    
+    T, N = x.shape
+    if T < 10:
+        raise ValueError(f"Insufficient time periods: T={T}, need at least 10")
+    
+    # Check r parameter
+    if not isinstance(r, np.ndarray):
+        r = np.array(r)
+    if np.any(r <= 0) or np.any(np.isnan(r)) or np.any(np.isinf(r)):
+        raise ValueError(f"r must contain positive finite values, got {r}")
+    
+    # Check p parameter
+    if not isinstance(p, (int, np.integer)) or p < 0:
+        raise ValueError(f"p must be non-negative integer, got {p}")
+    
+    # Check blocks shape
+    if blocks.ndim != 2 or blocks.shape[0] != N:
+        raise ValueError(f"blocks shape {blocks.shape} doesn't match N={N}")
+    
+    # Check nQ
+    if not isinstance(nQ, (int, np.integer)) or nQ < 0 or nQ >= N:
+        raise ValueError(f"nQ must be integer 0 <= nQ < N={N}, got {nQ}")
+
+
+def _validate_em_inputs(y: np.ndarray, A: np.ndarray, C: np.ndarray, 
+                            Q: np.ndarray, R: np.ndarray, Z_0: np.ndarray, 
+                            V_0: np.ndarray, r: np.ndarray, p: int, 
+                            blocks: np.ndarray, nQ: int) -> None:
+    """Validate inputs for em_step() function.
+    
+    Parameters
+    ----------
+    y : np.ndarray
+        Data matrix (n x T)
+    A : np.ndarray
+        Transition matrix (m x m)
+    C : np.ndarray
+        Observation matrix (n x m)
+    Q : np.ndarray
+        Covariance for transition residuals (m x m)
+    R : np.ndarray
+        Covariance for observation residuals (n x n)
+    Z_0 : np.ndarray
+        Initial state (m,)
+    V_0 : np.ndarray
+        Initial covariance (m x m)
+    r : np.ndarray
+        Number of common factors for each block
+    p : int
+        Number of lags
+    blocks : np.ndarray
+        Block loading structure (n x n_blocks)
+    nQ : int
+        Number of quarterly variables
+        
+    Raises
+    ------
+    ValueError
+        If inputs are invalid or dimensions don't match
+    """
+    # Check y dimensions
+    if y.ndim != 2:
+        raise ValueError(f"y must be 2D array, got shape {y.shape}")
+    n, T = y.shape
+    
+    # Check matrix dimensions match
+    if A.ndim != 2 or A.shape[0] != A.shape[1]:
+        raise ValueError(f"A must be square matrix, got shape {A.shape}")
+    m = A.shape[0]
+    
+    if C.shape != (n, m):
+        raise ValueError(f"C shape {C.shape} != expected ({n}, {m})")
+    if Q.shape != (m, m):
+        raise ValueError(f"Q shape {Q.shape} != expected ({m}, {m})")
+    if R.shape != (n, n):
+        raise ValueError(f"R shape {R.shape} != expected ({n}, {n})")
+    if Z_0.shape != (m,):
+        raise ValueError(f"Z_0 shape {Z_0.shape} != expected ({m},)")
+    if V_0.shape != (m, m):
+        raise ValueError(f"V_0 shape {V_0.shape} != expected ({m}, {m})")
+    
+    # Check blocks shape
+    if blocks.ndim != 2 or blocks.shape[0] != n:
+        raise ValueError(f"blocks shape {blocks.shape} doesn't match n={n}")
+    
+    # Check for NaN/Inf in parameter matrices (simplified - only critical checks)
+    if np.any(np.isnan(A)) or np.any(np.isinf(A)):
+        raise ValueError(f"A contains NaN/Inf values")
+    if np.any(np.isnan(C)) or np.any(np.isinf(C)):
+        raise ValueError(f"C contains NaN/Inf values")
+    
+    # Check parameter ranges
+    if not isinstance(p, (int, np.integer)) or p < 0:
+        raise ValueError(f"p must be non-negative integer, got {p}")
+    
+    if nQ < 0 or nQ >= n:
+        raise ValueError(f"nQ must be 0 <= nQ < n={n}, got {nQ}")
+
+
+@dataclass
+class DFMResult:
+    """DFM estimation results structure.
+    
+    This dataclass contains all outputs from the DFM estimation procedure,
+    including estimated parameters, smoothed data, and factors.
+    
+    Attributes
+    ----------
+    x_sm : np.ndarray
+        Standardized smoothed data matrix (T x N), where T is time periods
+        and N is number of series. Data is standardized (zero mean, unit variance).
+    X_sm : np.ndarray
+        Unstandardized smoothed data matrix (T x N). This is the original-scale
+        version of x_sm, computed as X_sm = x_sm * Wx + Mx.
+    Z : np.ndarray
+        Smoothed factor estimates (T x m), where m is the state dimension.
+        Columns represent different factors (common factors and idiosyncratic components).
+    C : np.ndarray
+        Observation/loading matrix (N x m). Each row corresponds to a series,
+        each column to a factor. C[i, j] gives the loading of series i on factor j.
+    R : np.ndarray
+        Covariance matrix for observation equation residuals (N x N).
+        Typically diagonal, representing idiosyncratic variances.
+    A : np.ndarray
+        Transition matrix (m x m) for the state equation. Describes how factors
+        evolve over time: Z_t = A @ Z_{t-1} + error.
+    Q : np.ndarray
+        Covariance matrix for transition equation residuals (m x m).
+        Describes the covariance of factor innovations.
+    Mx : np.ndarray
+        Series means (N,). Used for standardization: x = (X - Mx) / Wx.
+    Wx : np.ndarray
+        Series standard deviations (N,). Used for standardization.
+    Z_0 : np.ndarray
+        Initial state vector (m,). Starting values for factors at t=0.
+    V_0 : np.ndarray
+        Initial covariance matrix (m x m) for factors. Uncertainty about Z_0.
+    r : np.ndarray
+        Number of factors per block (n_blocks,). Each element specifies
+        how many factors are in each block structure.
+    p : int
+        Number of lags in the autoregressive structure of factors. Typically p=1.
+    
+    Examples
+    --------
+    >>> Res = dfm(X, config, threshold=1e-4)
+    >>> # Access smoothed factors
+    >>> common_factor = Res.Z[:, 0]
+    >>> # Access factor loadings for first series
+    >>> loadings = Res.C[0, :]
+    >>> # Reconstruct smoothed series from factors
+    >>> reconstructed = Res.Z @ Res.C.T
+    """
+    x_sm: np.ndarray      # Standardized smoothed data (T x N)
+    X_sm: np.ndarray      # Unstandardized smoothed data (T x N)
+    Z: np.ndarray         # Smoothed factors (T x m)
+    C: np.ndarray         # Observation matrix (N x m)
+    R: np.ndarray         # Covariance for observation residuals (N x N)
+    A: np.ndarray         # Transition matrix (m x m)
+    Q: np.ndarray         # Covariance for transition residuals (m x m)
+    Mx: np.ndarray        # Series means (N,)
+    Wx: np.ndarray        # Series standard deviations (N,)
+    Z_0: np.ndarray       # Initial state (m,)
+    V_0: np.ndarray       # Initial covariance (m x m)
+    r: np.ndarray         # Number of factors per block
+    p: int                # Number of lags
+
+
+def em_converged(loglik: float, previous_loglik: float, threshold: float = 1e-4,
+                 check_decreased: bool = True) -> Tuple[bool, bool]:
+    """Check whether EM algorithm has converged.
+    
+    Convergence is determined by the relative change in log-likelihood being
+    below the threshold: |loglik - previous_loglik| / avg(|loglik|, |previous_loglik|) < threshold.
+    
+    Parameters
+    ----------
+    loglik : float
+        Log-likelihood from current EM iteration. Should be finite and typically
+        negative (log-likelihoods are usually negative).
+    previous_loglik : float
+        Log-likelihood from previous EM iteration. Used to compute change.
+    threshold : float, optional
+        Convergence threshold (default 1e-4). Smaller values require more iterations
+        but provide more precise convergence. Typical range: 1e-5 to 1e-3.
+    check_decreased : bool, optional
+        Whether to check if log-likelihood decreased (default True). If True and
+        loglik < previous_loglik - 1e-3, decrease flag is set and a warning printed.
+        
+    Returns
+    -------
+    converged : bool
+        True if convergence criteria satisfied, False otherwise.
+    decrease : bool
+        True if log-likelihood decreased (only meaningful if check_decreased=True).
+        A decrease may indicate numerical issues but is allowed to happen.
+    
+    Examples
+    --------
+    >>> loglik_current = -1234.56
+    >>> loglik_previous = -1235.12
+    >>> converged, decreased = em_converged(loglik_current, loglik_previous, threshold=1e-4)
+    >>> if converged:
+    ...     print("EM algorithm converged")
+    """
+    converged = False
+    decrease = False
+    
+    if check_decreased:
+        if loglik - previous_loglik < -1e-3:  # Allow for a little imprecision
+            print(f"******likelihood decreased from {previous_loglik:.4f} to {loglik:.4f}!")
+            decrease = True
+    
+    # Check convergence criteria
+    delta_loglik = abs(loglik - previous_loglik)
+    avg_loglik = (abs(loglik) + abs(previous_loglik) + np.finfo(float).eps) / 2
+    
+    if (delta_loglik / avg_loglik) < threshold:
+        converged = True
+    
+    return converged, decrease
+
+
+def init_conditions(x: np.ndarray, r: np.ndarray, p: int, blocks: np.ndarray,
+                   opt_nan: dict, Rcon: np.ndarray, q: np.ndarray,
+                   nQ: int, i_idio: np.ndarray) -> Tuple[np.ndarray, np.ndarray, np.ndarray,
+                                                          np.ndarray, np.ndarray, np.ndarray]:
+    """Calculate initial conditions for parameter estimation.
+    
+    This function computes initial parameter estimates using principal component
+    analysis (PCA) for factors and ordinary least squares (OLS) for AR coefficients.
+    These initial values are then refined by the EM algorithm in `dfm()`.
+    
+    The function handles:
+    - Factor extraction via eigendecomposition of residual covariance
+    - AR coefficient estimation via OLS regression
+    - Quarterly aggregation constraints for quarterly series
+    - Idiosyncratic component initialization
+    
+    Parameters
+    ----------
+    x : np.ndarray
+        Standardized data matrix (T x N), where T is time periods and N is series.
+        Data should already be standardized (zero mean, unit variance).
+        Missing values (NaN) are handled via spline interpolation.
+    r : np.ndarray
+        Number of common factors for each block (n_blocks,). Typically all ones
+        indicating one factor per block. Example: np.array([1, 1, 1, 1]) for 4 blocks.
+    p : int
+        Number of lags in the transition equation. Typically p=1 (AR(1) process).
+        Higher values create more complex dynamics but require more parameters.
+    blocks : np.ndarray
+        Block loading structure (N x n_blocks). Each row corresponds to a series,
+        each column to a block. Value 1 indicates the series loads on that block.
+        All series must load on the first block (global factor).
+    opt_nan : dict
+        Options for missing value handling. Should contain:
+        - 'method': int, method for NaN handling (typically 2 or 3)
+        - 'k': int, spline parameter (typically 3)
+        See `rem_nans_spline` for details.
+    Rcon : np.ndarray
+        Quarterly aggregation constraints matrix (4 x 5). Implements the "tent structure"
+        that aggregates monthly values to quarterly. Standard structure is:
+        [[2, -1, 0, 0, 0],
+         [3, 0, -1, 0, 0],
+         [2, 0, 0, -1, 0],
+         [1, 0, 0, 0, -1]]
+    q : np.ndarray
+        Constraints vector (4,). Typically all zeros: np.zeros(4).
+        Used with Rcon to enforce quarterly aggregation.
+    nQ : int
+        Number of quarterly variables. Must satisfy 0 <= nQ < N.
+        The first (N - nQ) series are assumed to be monthly.
+    i_idio : np.ndarray
+        Logical array (N,) indicating idiosyncratic components: 1 for monthly series,
+        0 for quarterly series. Typically: np.concatenate([np.ones(N-nQ), np.zeros(nQ)]).
+        
+    Returns
+    -------
+    A : np.ndarray
+        Initial transition matrix (m x m), where m is the state dimension.
+        Block diagonal structure: factors, monthly idiosyncratic, quarterly idiosyncratic.
+    C : np.ndarray
+        Initial observation/loading matrix (N x m). Loadings are estimated via PCA
+        (eigendecomposition of residual covariance) for monthly series and constrained
+        least squares for quarterly series.
+    Q : np.ndarray
+        Initial covariance matrix for transition residuals (m x m). Block diagonal.
+        Diagonal elements represent innovation variances.
+    R : np.ndarray
+        Initial covariance matrix for observation residuals (N x N). Diagonal matrix.
+        Diagonal elements are residual variances (idiosyncratic variances).
+    Z_0 : np.ndarray
+        Initial state vector (m,). Typically zeros: np.zeros(m).
+    V_0 : np.ndarray
+        Initial covariance matrix for state (m x m). Computed from steady-state
+        of the AR process: V_0 = inv(I - kron(A, A)) @ vec(Q).
+        
+    Raises
+    ------
+    ValueError
+        If inputs are invalid or dimensions don't match. Also raised if numerical
+        issues prevent computation (though fallback strategies will be attempted).
+        
+    Notes
+    -----
+    - The function uses fallback strategies when numerical issues occur (e.g., singular
+      matrices, eigendecomposition failures). These are logged at WARNING level.
+    - For quarterly series, loadings must satisfy aggregation constraints that ensure
+      quarterly aggregates match monthly weighted sums.
+    - The state dimension m is computed as: sum(r) * max(p, 5) + monthly_idio + quarterly_idio * 5
+      
+    Examples
+    --------
+    >>> from dfm_python import load_config, load_data, dfm
+    >>> # Load configuration from YAML or CSV
+    >>> config = load_config('config.yaml')
+    >>> # Load data from CSV file
+    >>> X, Time, Z = load_data('data.csv', config)
+    >>> # Standardize data
+    >>> x = (X - np.nanmean(X, axis=0)) / np.nanstd(X, axis=0)
+    >>> # Set up parameters
+    >>> r = np.ones(config.Blocks.shape[1])
+    >>> p = 1
+    >>> nQ = np.sum(np.array(config.Frequency) == 'q')
+    >>> i_idio = np.concatenate([np.ones(len(config.SeriesID) - nQ), np.zeros(nQ)])
+    >>> Rcon = np.array([[2, -1, 0, 0, 0], [3, 0, -1, 0, 0], 
+    ...                  [2, 0, 0, -1, 0], [1, 0, 0, 0, -1]])
+    >>> q = np.zeros(4)
+    >>> opt_nan = {'method': 2, 'k': 3}
+    >>> # Compute initial conditions
+    >>> A, C, Q, R, Z_0, V_0 = init_conditions(
+    ...     x, r, p, config.Blocks, opt_nan, Rcon, q, nQ, i_idio
+    ... )
+    """
+    # Validate inputs
+    _validate_init_inputs(x, r, p, blocks, nQ)
+    
+    pC = Rcon.shape[1]  # Tent structure size (quarterly to monthly)
+    ppC = int(max(p, pC))  # Ensure integer
+    n_b = blocks.shape[1]  # Number of blocks
+    
+    # Spline without NaNs
+    xBal, indNaN = _rem_nans_spline(x, method=opt_nan['method'], k=opt_nan['k'])
+    
+    T, N = xBal.shape
+    nM = N - nQ  # Number of monthly series
+    
+    xNaN = xBal.copy()
+    xNaN[indNaN] = np.nan
+    res = xBal.copy()  # Spline output, later used for residuals
+    resNaN = xNaN.copy()
+    
+    # Initialize model coefficient output
+    C = None
+    A = None
+    Q = None
+    V_0 = None
+    
+    # Set first observations as NaNs for quarterly-monthly aggregation scheme
+    indNaN[:pC-1, :] = True
+    
+    # Loop for each block
+    for i in range(n_b):
+        r_i = int(r[i])  # r_i = 1 when block is loaded (ensure integer)
+        
+        # Observation equation
+        C_i = np.zeros((N, int(r_i * ppC)))
+        idx_i = np.where(blocks[:, i] == 1)[0]  # Series loading block i
+        idx_iM = idx_i[idx_i < nM]  # Monthly series indices
+        idx_iQ = idx_i[idx_i >= nM]  # Quarterly series indices
+        
+        if len(idx_iM) > 0:
+            # Returns eigenvector v with largest eigenvalue d
+            # Calculate covariance, handling edge cases
+            try:
+                # Extract data for this block, handling NaN values
+                res_block = res[:, idx_iM].copy()
+                # Remove rows with any NaN (np.cov doesn't handle NaN)
+                finite_rows = np.all(np.isfinite(res_block), axis=1)
+                n_finite = np.sum(finite_rows)
+                n_total = len(finite_rows)
+                completeness_pct = (n_finite / n_total * 100) if n_total > 0 else 0.0
+                
+                # Check minimum data requirements
+                min_obs_required = max(2, len(idx_iM) + 1)  # Need at least n+1 observations for n series
+                if n_finite < min_obs_required:
+                    # Not enough finite data - use identity
+                    _logger.warning(
+                        f"init_conditions: Block {i+1} has insufficient data for covariance calculation. "
+                        f"Series in block: {len(idx_iM)}, Finite observations: {n_finite}/{n_total} "
+                        f"({completeness_pct:.1f}%), Required: {min_obs_required}. "
+                        f"Using identity matrix as fallback."
+                    )
+                    raise ValueError(f"Insufficient finite data: {n_finite} < {min_obs_required}")
+                
+                res_block_clean = res_block[finite_rows, :]
+                cov_res = np.cov(res_block_clean.T)
+                
+                # Check for NaN/Inf in covariance
+                if np.any(np.isnan(cov_res)) or np.any(np.isinf(cov_res)):
+                    # Replace with identity if covariance invalid
+                    _logger.warning(
+                        f"init_conditions: Block {i+1} covariance contains NaN/Inf values. "
+                        f"Series in block: {len(idx_iM)}, Finite observations: {n_finite}/{n_total}. "
+                        f"Using identity matrix as fallback."
+                    )
+                    cov_res = np.eye(len(idx_iM))
+                # Check for constant series (zero variance) and regularize
+                var_diag = np.diag(cov_res)
+                if np.any(var_diag < 1e-10):
+                    cov_res = cov_res + np.eye(len(idx_iM)) * 1e-8
+            except (ValueError, np.linalg.LinAlgError) as e:
+                # Covariance calculation failed - use identity as fallback
+                # This can happen with insufficient data or numerical issues
+                _logger.warning(
+                    f"init_conditions: Covariance calculation failed for block {i+1}. "
+                    f"Series in block: {len(idx_iM)}, Series indices: {idx_iM.tolist()}. "
+                    f"Error: {type(e).__name__}: {str(e)}. Using identity matrix as fallback."
+                )
+                cov_res = np.eye(len(idx_iM))
+            
+            if cov_res.size == 1:
+                # Single series case
+                v = np.array([[1.0]])
+                d = cov_res[0, 0] if not (np.isnan(cov_res[0, 0]) or np.isinf(cov_res[0, 0])) else 1.0
+            else:
+                n_series = len(idx_iM)
+                # Use eigs only if k < n_series - 1, otherwise use regular eig
+                if int(r_i) < n_series - 1:
+                    try:
+                        # Use sparse matrix for eigs
+                        cov_sparse = csc_matrix(cov_res)
+                        d, v = eigs(cov_sparse, k=int(r_i), which='LM')
+                        v = v.real
+                        # Check for NaN/Inf in results
+                        if np.any(np.isnan(d)) or np.any(np.isinf(d)) or np.any(np.isnan(v)) or np.any(np.isinf(v)):
+                            raise ValueError("Invalid eigenvalue results")
+                    except (ValueError, np.linalg.LinAlgError, RuntimeError) as e:
+                        # Sparse eigendecomposition failed - fallback to regular eig
+                        # This can happen if matrix is too small for sparse methods or has numerical issues
+                        _logger.warning(
+                            f"init_conditions: Sparse eigendecomposition failed for block {i+1}, "
+                            f"falling back to np.linalg.eig. Error: {type(e).__name__}"
+                        )
+                        d, v = np.linalg.eig(cov_res)
+                        # Sort by eigenvalue magnitude and take top r_i
+                        idx = np.argsort(np.abs(d))[::-1][:int(r_i)]
+                        d = d[idx]
+                        v = v[:, idx]
+                        v = v.real
+                else:
+                    # Use regular eig for full eigendecomposition
+                    try:
+                        d, v = np.linalg.eig(cov_res)
+                        # Check for NaN/Inf
+                        valid = ~(np.isnan(d) | np.isinf(d))
+                        if np.sum(valid) < int(r_i):
+                            raise ValueError("Not enough valid eigenvalues")
+                        # Sort by eigenvalue magnitude and take top r_i
+                        idx = np.argsort(np.abs(d[valid]))[::-1][:int(r_i)]
+                        d = d[valid][idx]
+                        v = v[:, valid][:, idx]
+                        v = v.real
+                    except (IndexError, ValueError, np.linalg.LinAlgError) as e:
+                        # Eigendecomposition or indexing failed - use identity as ultimate fallback
+                        # This indicates severe numerical issues, but allows initialization to continue
+                        _logger.warning(
+                            f"init_conditions: Eigendecomposition failed for block {i+1}, "
+                            f"using identity matrix as ultimate fallback. Error: {type(e).__name__}"
+                        )
+                        v = np.eye(len(idx_iM))[:, :int(r_i)]
+                        d = np.ones(int(r_i))
+            
+            # Flip sign for cleaner output
+            if np.sum(v) < 0:
+                v = -v
+            
+            # For monthly series with loaded blocks, replace with eigenvector
+            C_i[idx_iM, :int(r_i)] = v
+            f = res[:, idx_iM] @ v  # Data projection for eigenvector direction
+            
+            # Lag matrix using loading
+            F = None
+            max_lag = max(p + 1, pC)
+            for kk in range(max_lag):
+                lag_data = f[pC - kk:T - kk, :]
+                if F is None:
+                    F = lag_data
+                else:
+                    F = np.hstack([F, lag_data])
+            
+            Rcon_i = np.kron(Rcon, np.eye(int(r_i)))  # Quarterly-monthly aggregation
+            q_i = np.kron(q, np.zeros(int(r_i)))
+            
+            # Projected data with lag structure
+            ff = F[:, :int(r_i * pC)]
+            
+            # Loop for quarterly variables
+            for j in idx_iQ:
+                # For series j, values are dropped to accommodate lag structure
+                xx_j = resNaN[pC:, j]
+                
+                if len(xx_j) < ff.shape[0]:
+                    # Align dimensions: pad or trim as needed
+                    if len(xx_j) > 0:
+                        xx_j_padded = np.full(ff.shape[0], np.nan)
+                        xx_j_padded[:len(xx_j)] = xx_j
+                        xx_j = xx_j_padded
+                
+                if np.sum(~np.isnan(xx_j)) < ff.shape[1] + 2:
+                    xx_j = res[pC:, j]  # Replace with spline if too many NaNs
+                
+                ff_j = ff[~np.isnan(xx_j), :]
+                xx_j_clean = xx_j[~np.isnan(xx_j)]
+                
+                if len(xx_j_clean) > 0 and ff_j.shape[0] > 0:
+                    try:
+                        iff_j = inv(ff_j.T @ ff_j)
+                        Cc = iff_j @ ff_j.T @ xx_j_clean  # Least squares
+                        
+                        # Monthly to quarterly conversion with constraints
+                        constraint_term = iff_j @ Rcon_i.T @ inv(Rcon_i @ iff_j @ Rcon_i.T) @ (Rcon_i @ Cc - q_i)
+                        Cc = Cc - constraint_term
+                        
+                        C_i[j, :int(pC * r_i)] = Cc
+                    except (np.linalg.LinAlgError, ValueError, IndexError) as e:
+                        # Matrix inversion or constraint application failed - set to zero
+                        # This can happen if constraint matrix is singular or dimensions mismatch
+                        _logger.debug(
+                            f"init_conditions: C matrix update failed for series {j} in block {i+1}, "
+                            f"setting to zero. Error: {type(e).__name__}"
+                        )
+                        C_i[j, :int(pC * r_i)] = 0.0
+        
+        # Pad ff with zeros to match res dimensions (T x N)
+        if 'ff' in locals():
+            # ff has shape (T - pC + 1, ...) from lag_data
+            # Need to pad to match res shape (T, ...)
+            ff_padded = np.vstack([np.zeros((pC - 1, int(pC * r_i))), ff])
+            # Ensure it matches T exactly
+            if ff_padded.shape[0] < T:
+                ff_padded = np.vstack([ff_padded, np.zeros((T - ff_padded.shape[0], int(pC * r_i)))])
+        else:
+            # If no monthly series, create dummy ff
+            ff_padded = np.zeros((T, int(pC * r_i)))
+            if len(idx_iM) > 0:
+                F = np.hstack([f] + [np.roll(f, -kk, axis=0) for kk in range(1, max(p+1, pC))])
+                ff = F[:, :int(r_i * pC)]
+                ff_padded = np.vstack([np.zeros((pC - 1, int(pC * r_i))), ff])
+                if ff_padded.shape[0] < T:
+                    ff_padded = np.vstack([ff_padded, np.zeros((T - ff_padded.shape[0], int(pC * r_i)))])
+        
+        # Residual calculations - ensure shapes match
+        if ff_padded.shape[0] == res.shape[0]:
+            res = res - ff_padded @ C_i.T
+        else:
+            # Trim or pad to match
+            if ff_padded.shape[0] > res.shape[0]:
+                ff_padded = ff_padded[:res.shape[0], :]
+            else:
+                ff_padded = np.vstack([ff_padded, np.zeros((res.shape[0] - ff_padded.shape[0], ff_padded.shape[1]))])
+            res = res - ff_padded @ C_i.T
+        resNaN = res.copy()
+        resNaN[indNaN] = np.nan
+        
+        # Combine loadings
+        if C is None:
+            C = C_i
+        else:
+            C = np.hstack([C, C_i])
+        
+        # Transition equation
+        if len(idx_iM) > 0:
+            z = F[:, :int(r_i)]  # Projected data (no lag)
+            Z_lag = F[:, int(r_i):int(r_i * (p + 1))]  # Data with lag 1
+            
+            A_i = np.zeros((int(r_i * ppC), int(r_i * ppC)))
+            
+            if Z_lag.shape[0] > 0 and Z_lag.shape[1] > 0:
+                try:
+                    A_temp = inv(Z_lag.T @ Z_lag) @ Z_lag.T @ z  # OLS: AR(p) process
+                    A_i[:int(r_i), :int(r_i * p)] = A_temp.T
+                except (np.linalg.LinAlgError, ValueError) as e:
+                    # OLS regression failed - set AR coefficients to zero
+                    # This can happen if Z_lag is singular or has insufficient rank
+                    _logger.debug(
+                        f"init_conditions: OLS regression failed for block {i+1}, "
+                        f"setting AR coefficients to zero. Error: {type(e).__name__}"
+                    )
+                    A_i[:int(r_i), :int(r_i * p)] = 0.0
+            
+            # Identity matrix for lag structure
+            if r_i * (ppC - 1) > 0:
+                A_i[int(r_i):, :int(r_i * (ppC - 1))] = np.eye(int(r_i * (ppC - 1)))
+            
+            Q_i = np.zeros((int(ppC * r_i), int(ppC * r_i)))
+            if len(z) > 0:
+                e = z - Z_lag @ A_temp if 'A_temp' in locals() else z
+                # Clean e before covariance calculation
+                e_clean = e.copy()
+                e_clean[np.isnan(e_clean)] = 0.0
+                e_clean[np.isinf(e_clean)] = 0.0
+                
+                if e_clean.shape[1] > 1:
+                    # Use np.cov but check for NaN/Inf
+                    try:
+                        Q_block = np.cov(e_clean.T)
+                        # Check for NaN/Inf in result
+                        if np.any(np.isnan(Q_block)) or np.any(np.isinf(Q_block)):
+                            Q_block = np.eye(int(r_i)) * 0.1
+                    except (ValueError, np.linalg.LinAlgError):
+                        Q_block = np.eye(int(r_i)) * 0.1
+                else:
+                    var_val = np.var(e_clean)
+                    Q_block = np.array([[var_val]]) if not (np.isnan(var_val) or np.isinf(var_val)) else np.eye(int(r_i)) * 0.1
+                
+                Q_i[:int(r_i), :int(r_i)] = Q_block
+            
+            # Clean A_i and Q_i before kron operation
+            A_i_clean = np.nan_to_num(A_i, nan=0.0, posinf=1.0, neginf=-1.0)
+            Q_i_clean = np.nan_to_num(Q_i, nan=0.0, posinf=1.0, neginf=-1.0)
+            
+            # Initial covariance
+            try:
+                # Check A_i_clean for invalid values before kron
+                if np.any(np.isnan(A_i_clean)) or np.any(np.isinf(A_i_clean)):
+                    raise ValueError("Invalid values in A_i")
+                
+                kron_matrix = np.kron(A_i_clean, A_i_clean)
+                # Check kron result
+                if np.any(np.isnan(kron_matrix)) or np.any(np.isinf(kron_matrix)):
+                    raise ValueError("Invalid values in kron(A_i, A_i)")
+                
+                inv_matrix = np.eye(int((r_i * ppC)**2)) - kron_matrix
+                # Check before inversion
+                if np.any(np.isnan(inv_matrix)) or np.any(np.isinf(inv_matrix)):
+                    raise ValueError("Invalid values in (I - kron(A, A))")
+                
+                Q_flat = Q_i_clean.flatten()
+                # Check Q_flat
+                if np.any(np.isnan(Q_flat)) or np.any(np.isinf(Q_flat)):
+                    raise ValueError("Invalid values in Q_i")
+                
+                initV_i = np.reshape(
+                    inv(inv_matrix) @ Q_flat,
+                    (int(r_i * ppC), int(r_i * ppC))
+                )
+                # Verify result is valid
+                if np.any(np.isnan(initV_i)) or np.any(np.isinf(initV_i)):
+                    raise ValueError("NaN/Inf in initV_i")
+            except (np.linalg.LinAlgError, ValueError, IndexError) as e:
+                # Matrix inversion failed or result invalid - use diagonal fallback
+                # This can happen if (I - kron(A, A)) is singular or numerical issues occur
+                _logger.warning(
+                    f"init_conditions: Initial covariance calculation failed for block {i+1}, "
+                    f"using diagonal fallback (0.1 * I). Error: {type(e).__name__}"
+                )
+                initV_i = np.eye(int(r_i * ppC)) * 0.1
+            
+            # Block diagonal matrices
+            if A is None:
+                A = A_i
+                Q = Q_i
+                V_0 = initV_i
+            else:
+                # Ensure all matrices are square before block_diag
+                if A_i.shape[0] == A_i.shape[1] and Q_i.shape[0] == Q_i.shape[1] and initV_i.shape[0] == initV_i.shape[1]:
+                    A = block_diag(A, A_i)
+                    Q = block_diag(Q, Q_i)
+                    V_0 = block_diag(V_0, initV_i)
+                else:
+                    # Fallback: concatenate if dimensions don't match
+                    _logger.debug(
+                        f"init_conditions: block_diag dimensions mismatch for block {i+1}, "
+                        f"using np.block concatenation fallback"
+                    )
+                    A = np.block([[A, np.zeros((A.shape[0], A_i.shape[1]))], 
+                                  [np.zeros((A_i.shape[0], A.shape[1])), A_i]])
+                    Q = np.block([[Q, np.zeros((Q.shape[0], Q_i.shape[1]))], 
+                                  [np.zeros((Q_i.shape[0], Q.shape[1])), Q_i]])
+                    V_0 = np.block([[V_0, np.zeros((V_0.shape[0], initV_i.shape[1]))], 
+                                    [np.zeros((initV_i.shape[0], V_0.shape[1])), initV_i]])
+        else:
+            # Dummy if no monthly series
+            A_i = np.eye(int(r_i * ppC)) * 0.9
+            Q_i = np.eye(int(r_i * ppC)) * 0.1
+            initV_i = np.eye(int(r_i * ppC)) * 0.1
+            if A is None:
+                A = A_i
+                Q = Q_i
+                V_0 = initV_i
+            else:
+                # Ensure all matrices are square
+                if A_i.shape[0] == A_i.shape[1] and Q_i.shape[0] == Q_i.shape[1] and initV_i.shape[0] == initV_i.shape[1]:
+                    A = block_diag(A, A_i)
+                    Q = block_diag(Q, Q_i)
+                    V_0 = block_diag(V_0, initV_i)
+                else:
+                    # Fallback: use np.block
+                    _logger.debug(
+                        f"init_conditions: block_diag dimensions mismatch for block {i+1} (V_0), "
+                        f"using np.block concatenation fallback"
+                    )
+                    A = np.block([[A, np.zeros((A.shape[0], A_i.shape[1]))], 
+                                  [np.zeros((A_i.shape[0], A.shape[1])), A_i]])
+                    Q = np.block([[Q, np.zeros((Q.shape[0], Q_i.shape[1]))], 
+                                  [np.zeros((Q_i.shape[0], Q.shape[1])), Q_i]])
+                    V_0 = np.block([[V_0, np.zeros((V_0.shape[0], initV_i.shape[1]))], 
+                                    [np.zeros((initV_i.shape[0], V_0.shape[1])), initV_i]])
+    
+    # Add idiosyncratic components
+    eyeN = np.eye(N)
+    eyeN = eyeN[:, i_idio.astype(bool)]  # Keep only monthly columns
+    
+    if C is None:
+        C = eyeN
+    else:
+        C = np.hstack([C, eyeN])
+    
+    # Monthly-quarterly aggregation scheme for quarterly idiosyncratic
+    quarterly_idio = np.zeros((nM, 5 * nQ))
+    quarterly_idio_q = np.kron(np.eye(nQ), np.array([[1], [2], [3], [2], [1]]))
+    quarterly_idio_full = np.vstack([quarterly_idio, quarterly_idio_q.T])
+    C = np.hstack([C, quarterly_idio_full])
+    
+    # Initialize covariance matrix
+    # Calculate variance, handling NaN/Inf cases
+    var_values = np.nanvar(resNaN, axis=0)
+    # Replace NaN/Inf with small default value
+    var_values = np.where((np.isnan(var_values) | np.isinf(var_values)), 1e-4, var_values)
+    # Ensure minimum variance to avoid numerical issues
+    var_values = np.maximum(var_values, 1e-4)
+    R = np.diag(var_values)
+    
+    # Monthly idiosyncratic AR parameters
+    ii_idio = np.where(i_idio)[0]
+    n_idio = len(ii_idio)
+    BM = np.zeros((n_idio, n_idio))
+    SM = np.zeros((n_idio, n_idio))
+    
+    for idx, i in enumerate(ii_idio):
+        R[i, i] = 1e-4
+        
+        res_i = resNaN[:, i]
+        res_i_full = res[:, i]
+        
+        # Count leading/ending NaNs
+        leadZero = 0
+        for t in range(T):
+            if np.isnan(res_i[t]):
+                leadZero += 1
+            else:
+                break
+        
+        endZero = 0
+        for t in range(T - 1, -1, -1):
+            if np.isnan(res_i[t]):
+                endZero += 1
+            else:
+                break
+        
+        # Truncate
+        if endZero > 0:
+            res_i_trunc = res_i_full[leadZero:T - endZero]
+        else:
+            res_i_trunc = res_i_full[leadZero:]
+        
+        if len(res_i_trunc) > 1:
+            # AR(1) process: res_i[1:] = BM * res_i[:-1] + error
+            # MATLAB: inv(res_i(1:end-1)'*res_i(1:end-1))*res_i(1:end-1)'*res_i(2:end)
+            # Copy to avoid read-only array issues
+            res_i_copy = res_i_trunc.copy()
+            X_ar = res_i_copy[:-1].reshape(-1, 1)  # Column vector (T-1 x 1)
+            y_ar = res_i_copy[1:].reshape(-1, 1)   # Column vector (T-1 x 1)
+            # X_ar.T @ X_ar is (1 x T-1) @ (T-1 x 1) = (1 x 1) scalar
+            XTX = X_ar.T @ X_ar
+            if XTX.size == 1 and XTX[0, 0] != 0 and not (np.isnan(XTX[0, 0]) or np.isinf(XTX[0, 0])):
+                try:
+                    BM_val = (1.0 / XTX[0, 0]) * (X_ar.T @ y_ar)
+                    BM_val_clean = BM_val[0, 0] if BM_val.size > 0 else 0.1
+                    # Ensure finite value
+                    if np.isnan(BM_val_clean) or np.isinf(BM_val_clean):
+                        BM_val_clean = 0.1
+                    BM[idx, idx] = BM_val_clean
+                    # Calculate variance with bounds checking
+                    residuals = res_i_trunc[1:] - res_i_trunc[:-1] * BM[idx, idx]
+                    var_val = np.var(residuals)
+                    SM[idx, idx] = var_val if not (np.isnan(var_val) or np.isinf(var_val)) else 0.1
+                except (ValueError, ZeroDivisionError, IndexError) as e:
+                    # AR coefficient calculation or variance computation failed - use defaults
+                    # This can happen with insufficient data or division by zero
+                    BM[idx, idx] = 0.1
+                    SM[idx, idx] = 0.1
+            else:
+                BM[idx, idx] = 0.1
+                SM[idx, idx] = 0.1
+        else:
+            BM[idx, idx] = 0.1
+            SM[idx, idx] = 0.1
+    
+    # Quarterly idiosyncratic
+    Rdiag = np.diag(R).copy()  # Copy to avoid read-only array
+    # Handle division by zero and NaN/Inf
+    sig_e = Rdiag[nM:N] / 19.0
+    sig_e = np.where((np.isnan(sig_e) | np.isinf(sig_e) | (sig_e < 1e-6)), 1e-4, sig_e)
+    Rdiag[nM:N] = 1e-4
+    R = np.diag(Rdiag)
+    
+    # Quarterly AR structure
+    rho0 = 0.1
+    temp = np.zeros((5, 5))
+    temp[0, 0] = 1
+    
+    SQ = np.kron(np.diag((1 - rho0**2) * sig_e), temp)
+    # BQ should be (5*nQ) x (5*nQ) - build properly
+    BQ_template = np.vstack([
+        np.hstack([rho0, np.zeros(4)]),
+        np.hstack([np.eye(4), np.zeros((4, 1))])
+    ])
+    BQ = np.kron(np.eye(int(nQ)), BQ_template)  # Ensure nQ is int
+    
+    try:
+        # Check if matrix is invertible before inversion
+        I_kron = np.eye((5 * nQ)**2)
+        kron_mat = np.kron(BQ, BQ)
+        inv_mat = I_kron - kron_mat
+        # Check for NaN/Inf in matrix
+        if np.any(np.isnan(inv_mat)) or np.any(np.isinf(inv_mat)):
+            raise ValueError("NaN/Inf in inversion matrix")
+        initViQ = np.reshape(
+            inv(inv_mat) @ SQ.flatten(),
+            (5 * nQ, 5 * nQ)
+        )
+        # Check result for NaN/Inf
+        if np.any(np.isnan(initViQ)) or np.any(np.isinf(initViQ)):
+            raise ValueError("NaN/Inf in initViQ result")
+    except (np.linalg.LinAlgError, ValueError, IndexError) as e:
+        # Matrix inversion failed or result invalid - use diagonal fallback for quarterly idiosyncratic
+        # This can happen if (I - kron(BQ, BQ)) is singular or nQ is zero
+        _logger.warning(
+            f"init_conditions: Quarterly idiosyncratic initial covariance calculation failed, "
+            f"using diagonal fallback (0.1 * I). Error: {type(e).__name__}"
+        )
+        initViQ = np.eye(5 * nQ) * 0.1
+    
+    try:
+        # Calculate denominator, handling division by zero
+        eye_diag = np.diag(np.eye(BM.shape[0]))
+        BM_diag_sq = np.diag(BM)**2
+        denom_val = eye_diag - BM_diag_sq
+        # Avoid division by zero
+        denom_val = np.where(np.abs(denom_val) < 1e-10, 1.0, denom_val)
+        denom_viM = np.diag(1.0 / denom_val)
+        # Check for NaN/Inf
+        if np.any(np.isnan(denom_viM)) or np.any(np.isinf(denom_viM)):
+            raise ValueError("NaN/Inf in denom_viM")
+        initViM = denom_viM @ SM
+        # Check result
+        if np.any(np.isnan(initViM)) or np.any(np.isinf(initViM)):
+            raise ValueError("NaN/Inf in initViM result")
+    except (np.linalg.LinAlgError, ValueError, ZeroDivisionError) as e:
+        # Matrix inversion failed, division by zero, or result invalid - use diagonal from SM
+        # This can happen if denom_viM calculation fails or SM has issues
+        _logger.warning(
+            f"init_conditions: Monthly idiosyncratic initial covariance calculation failed, "
+            f"using diagonal from SM as fallback. Error: {type(e).__name__}"
+        )
+        initViM = np.diag(np.diag(SM)).copy()
+        # Ensure finite
+        initViM = np.where(np.isnan(initViM) | np.isinf(initViM), 0.1, initViM)
+    
+    # Final block diagonal - ensure all matrices are square
+    # Verify dimensions before block_diag
+    if BM.shape[0] != BM.shape[1]:
+        BM = np.diag(np.diag(BM))  # Force square
+    if SM.shape[0] != SM.shape[1]:
+        SM = np.diag(np.diag(SM))  # Force square
+    if BQ.shape[0] != BQ.shape[1]:
+        # BQ should already be square, but if not, force it
+        min_dim = min(BQ.shape)
+        BQ = np.diag(np.diag(BQ[:min_dim, :min_dim]))
+    if SQ.shape[0] != SQ.shape[1]:
+        SQ = np.diag(np.diag(SQ))
+    
+    A = block_diag(A, BM, BQ)
+    Q = block_diag(Q, SM, SQ)
+    Z_0 = np.zeros(A.shape[0])
+    
+    # Ensure V_0 matrices are square before block_diag
+    if V_0.shape[0] != V_0.shape[1]:
+        V_0 = np.diag(np.diag(V_0))
+    if initViM.shape[0] != initViM.shape[1]:
+        initViM = np.diag(np.diag(initViM))
+    if initViQ.shape[0] != initViQ.shape[1]:
+        initViQ = np.diag(np.diag(initViQ))
+    
+    V_0 = block_diag(V_0, initViM, initViQ)
+    
+    # Diagnostic check: Verify all outputs are finite before returning
+    output_params = {
+        'A': A, 'C': C, 'Q': Q, 'R': R, 'Z_0': Z_0, 'V_0': V_0
+    }
+    
+    for param_name, param_value in output_params.items():
+        nan_count = np.sum(np.isnan(param_value)) if param_value.size > 0 else 0
+        inf_count = np.sum(np.isinf(param_value)) if param_value.size > 0 else 0
+        
+        if nan_count > 0:
+            _logger.warning(
+                f"init_conditions: Output {param_name} contains {nan_count} NaN values "
+                f"(shape: {param_value.shape})"
+            )
+        if inf_count > 0:
+            _logger.warning(
+                f"init_conditions: Output {param_name} contains {inf_count} Inf values "
+                f"(shape: {param_value.shape})"
+            )
+        
+        # Attempt to clean NaN/Inf values if detected
+        if nan_count > 0 or inf_count > 0:
+            if param_name in ['A', 'Q', 'V_0']:
+                # Covariance matrices: regularize
+                param_value = np.nan_to_num(param_value, nan=0.0, posinf=1e6, neginf=-1e6)
+                param_value = 0.5 * (param_value + param_value.T)  # Ensure symmetry
+                param_value = param_value + np.eye(param_value.shape[0]) * 1e-8
+                output_params[param_name] = param_value
+            elif param_name == 'R':
+                # Diagonal matrix: clean diagonal
+                param_value = np.diag(np.diag(param_value))  # Ensure diagonal
+                R_diag = np.diag(param_value)
+                R_diag = np.where(
+                    (np.isnan(R_diag)) | (np.isinf(R_diag)) | (R_diag < 1e-6),
+                    1e-4, R_diag
+                )
+                output_params[param_name] = np.diag(R_diag)
+            elif param_name == 'C':
+                # Loading matrix: replace with zeros
+                param_value = np.nan_to_num(param_value, nan=0.0, posinf=1.0, neginf=-1.0)
+                output_params[param_name] = param_value
+            elif param_name == 'Z_0':
+                # Initial state: reset to zeros
+                param_value = np.zeros_like(param_value)
+                output_params[param_name] = param_value
+    
+    # Update variables with cleaned values
+    A, C, Q, R, Z_0, V_0 = output_params['A'], output_params['C'], output_params['Q'], \
+                           output_params['R'], output_params['Z_0'], output_params['V_0']
+    
+    return A, C, Q, R, Z_0, V_0
+
+
+def em_step(y: np.ndarray, A: np.ndarray, C: np.ndarray, Q: np.ndarray,
+           R: np.ndarray, Z_0: np.ndarray, V_0: np.ndarray,
+           r: np.ndarray, p: int, R_mat: np.ndarray, q: np.ndarray,
+           nQ: int, i_idio: np.ndarray, blocks: np.ndarray) -> Tuple[np.ndarray, np.ndarray,
+                                                                      np.ndarray, np.ndarray,
+                                                                      np.ndarray, np.ndarray, float]:
+    """Apply EM algorithm for parameter reestimation.
+    
+    This function implements one iteration of the Expectation-Maximization (EM) algorithm
+    for dynamic factor models. It consists of:
+    
+    1. **E-step**: Run Kalman filter and smoother to obtain smoothed factor estimates
+       and covariances: E[Z_t | data], E[Z_t Z_t' | data], etc.
+    
+    2. **M-step**: Update model parameters (C, R, A, Q) by maximizing the expected
+       complete-data log-likelihood given the smoothed estimates.
+    
+    The function handles:
+    - Monthly and quarterly series separately
+    - Block structure for factors
+    - Quarterly aggregation constraints
+    - Idiosyncratic components (monthly and quarterly)
+    - Missing data (via selection matrices Wt)
+    
+    Parameters
+    ----------
+    y : np.ndarray
+        Data matrix (n x T), where n is number of series and T is time periods.
+        Note: y is TRANSPOSED relative to input X (which is T x N).
+        Missing values should be NaN. Data should be standardized.
+    A : np.ndarray
+        Current transition matrix (m x m). Describes factor dynamics.
+    C : np.ndarray
+        Current observation/loading matrix (n x m). Maps factors to observed series.
+    Q : np.ndarray
+        Current covariance matrix for transition residuals (m x m).
+    R : np.ndarray
+        Current covariance matrix for observation residuals (n x n). Typically diagonal.
+    Z_0 : np.ndarray
+        Current initial state vector (m,).
+    V_0 : np.ndarray
+        Current initial covariance matrix (m x m).
+    r : np.ndarray
+        Number of factors per block (n_blocks,). Typically all ones.
+    p : int
+        Number of lags in transition equation. Typically 1.
+    R_mat : np.ndarray
+        Quarterly aggregation constraints matrix (4 x 5). Same as Rcon in init_conditions.
+    q : np.ndarray
+        Constraints vector (4,). Typically zeros.
+    nQ : int
+        Number of quarterly variables.
+    i_idio : np.ndarray
+        Logical array (n,) indicating idiosyncratic components: 1 for monthly, 0 for quarterly.
+    blocks : np.ndarray
+        Block loading structure (n x n_blocks). See init_conditions() for details.
+        
+    Returns
+    -------
+    C_new : np.ndarray
+        Updated observation matrix (n x m). Loadings are re-estimated via least squares
+        using smoothed factor estimates.
+    R_new : np.ndarray
+        Updated observation residual covariance (n x n). Diagonal matrix containing
+        updated idiosyncratic variances.
+    A_new : np.ndarray
+        Updated transition matrix (m x m). AR coefficients are re-estimated via OLS
+        using smoothed factor estimates.
+    Q_new : np.ndarray
+        Updated transition residual covariance (m x m). Contains innovation variances.
+    Z_0 : np.ndarray
+        Updated initial state (m,). Typically unchanged from input.
+    V_0_new : np.ndarray
+        Updated initial covariance (m x m). Computed from smoothed state estimates.
+    loglik : float
+        Log-likelihood of the data under the current parameters. This is the
+        incomplete-data log-likelihood computed by the Kalman filter.
+        
+    Raises
+    ------
+    ValueError
+        If inputs are invalid or matrix dimensions don't match. Also raised if
+        numerical issues occur (e.g., singular matrices, NaN/Inf propagation).
+        
+    Notes
+    -----
+    - This is a computationally intensive function that involves multiple matrix
+      inversions and large matrix operations. Performance scales with O(T * m^3).
+    - The function handles missing data via diagonal selection matrices Wt that
+      zero out missing observations.
+    - For quarterly series, loadings must satisfy aggregation constraints enforced
+      via constrained least squares.
+    - Some parameter updates may fail silently (e.g., singular matrices) and use
+      previous values. These cases are handled gracefully to allow EM to continue.
+      
+    Examples
+    --------
+    >>> # Get initial parameters from init_conditions()
+    >>> A, C, Q, R, Z_0, V_0 = init_conditions(...)
+    >>> # Prepare data (transpose to n x T)
+    >>> y = x.T  # n x T
+    >>> # Run one EM step
+    >>> C_new, R_new, A_new, Q_new, Z_0_new, V_0_new, loglik = em_step(
+    ...     y, A, C, Q, R, Z_0, V_0, r, p, R_mat, q, nQ, i_idio, blocks
+    ... )
+    >>> # Update parameters for next iteration
+    >>> A, C, Q, R, Z_0, V_0 = A_new, C_new, Q_new, R_new, Z_0_new, V_0_new
+    """
+    # Validate inputs (note: validation disabled during iterations for performance)
+    # Uncomment if debugging: _validate_em_step_inputs(y, A, C, Q, R, Z_0, V_0, r, p, blocks, nQ)
+    
+    # Numerical stability: check and clean parameter matrices before Kalman filter
+    # This prevents NaN/Inf from propagating into the filter
+    if np.any(np.isnan(A)) or np.any(np.isinf(A)):
+        _logger.warning("em_step: A contains NaN/Inf, using regularized identity")
+        A = np.eye(A.shape[0]) * 0.9 + np.nan_to_num(A, nan=0.0, posinf=1.0, neginf=-1.0) * 0.1
+    
+    if np.any(np.isnan(Q)) or np.any(np.isinf(Q)):
+        _logger.warning("em_step: Q contains NaN/Inf, regularizing")
+        Q = np.nan_to_num(Q, nan=1e-6, posinf=1e6, neginf=1e-6)
+        Q = 0.5 * (Q + Q.T)  # Ensure symmetry
+        Q = Q + np.eye(Q.shape[0]) * 1e-8  # Ensure positive definite
+    
+    if np.any(np.isnan(R)) or np.any(np.isinf(R)):
+        _logger.warning("em_step: R contains NaN/Inf, regularizing")
+        R = np.nan_to_num(R, nan=1e-4, posinf=1e4, neginf=1e-4)
+        R = 0.5 * (R + R.T)  # Ensure symmetry
+        # Ensure R is diagonal with positive values
+        R_diag = np.diag(R)
+        R_diag = np.where((R_diag < 1e-6) | np.isnan(R_diag) | np.isinf(R_diag), 1e-4, R_diag)
+        R = np.diag(R_diag)
+    
+    if np.any(np.isnan(C)) or np.any(np.isinf(C)):
+        _logger.warning("em_step: C contains NaN/Inf, regularizing")
+        C = np.nan_to_num(C, nan=0.0, posinf=1.0, neginf=-1.0)
+    
+    if np.any(np.isnan(Z_0)) or np.any(np.isinf(Z_0)):
+        _logger.warning("em_step: Z_0 contains NaN/Inf, resetting to zeros")
+        Z_0 = np.zeros_like(Z_0)
+    
+    if np.any(np.isnan(V_0)) or np.any(np.isinf(V_0)):
+        _logger.warning("em_step: V_0 contains NaN/Inf, using regularized identity")
+        V_0 = np.eye(V_0.shape[0]) * 0.1
+    
+    n, T = y.shape  # n series, T time periods
+    nM = n - nQ
+    pC = R_mat.shape[1]
+    ppC = int(max(p, pC))  # Ensure integer
+    num_blocks = blocks.shape[1]
+    
+    # E-step: Run Kalman filter and smoother
+    # Note: y is n x T (series x time), need to transpose for Kalman filter
+    # Kalman filter expects k x nobs, so we pass y as-is
+    zsmooth, vsmooth, vvsmooth, loglik = run_kf(y, A, C, Q, R, Z_0, V_0)
+    
+    # zsmooth is m x (T+1) from run_kf (factors x time)
+    # MATLAB: Zsmooth = runKF(y, A, C, Q, R, Z_0, V_0)' - transpose makes it (T+1) x m
+    # So Zsmooth(t+1, bl_idxM(i,:)) selects time t+1, factors indicated by bl_idxM(i,:)
+    # In Python: transpose to match MATLAB: (T+1) x m (time x factors)
+    # Keep initial state (column 0) since MATLAB uses t+1 indexing (skips initial)
+    Zsmooth = zsmooth.T  # m x (T+1) -> (T+1) x m
+    
+    # M-step: Update parameters
+    # Initialize output
+    A_new = A.copy()
+    Q_new = Q.copy()
+    V_0_new = V_0.copy()
+    
+    # Update factor parameters for each block
+    for i in range(num_blocks):
+        r_i = int(r[i])
+        rp = r_i * p
+        # MATLAB: rp1 = sum(r(1:i-1))*ppC (1-based, so we use sum of previous blocks)
+        rp1 = int(np.sum(r[:i]) * ppC)  # Python 0-based: sum of r[0] to r[i-1]
+        # MATLAB: b_subset = rp1+1:rp1+rp (1-based indexing)
+        b_subset = slice(rp1, rp1 + rp)  # Python 0-based: rp1 to rp1+rp-1
+        t_start = rp1  # Python 0-based
+        t_end = int(rp1 + r_i * ppC)  # Ensure integer
+        
+        # E[f_t * f_t' | Omega_T]
+        # MATLAB: Zsmooth(b_subset, 2:end) means columns 2 to end (skip initial state)
+        # Python: Zsmooth[b_subset, 1:] is equivalent (skip column 0)
+        EZZ = Zsmooth[b_subset, 1:] @ Zsmooth[b_subset, 1:].T + np.sum(vsmooth[b_subset, :, :][:, b_subset, 1:], axis=2)
+        
+        # E[f_{t-1} * f_{t-1}' | Omega_T]
+        # MATLAB: Zsmooth(b_subset, 1:end-1) means columns 1 to end-1
+        EZZ_BB = Zsmooth[b_subset, :-1] @ Zsmooth[b_subset, :-1].T + np.sum(vsmooth[b_subset, :, :][:, b_subset, :-1], axis=2)
+        
+        # E[f_t * f_{t-1}' | Omega_T]
+        # MATLAB: Zsmooth(b_subset, 2:end) * Zsmooth(b_subset, 1:end-1)'
+        EZZ_FB = Zsmooth[b_subset, 1:] @ Zsmooth[b_subset, :-1].T + np.sum(vvsmooth[b_subset, :, :][:, b_subset, :], axis=2)
+        
+        # Clean EZZ_BB and EZZ_FB before matrix operations
+        EZZ_BB = np.nan_to_num(EZZ_BB, nan=0.0, posinf=1e6, neginf=-1e6)
+        EZZ_FB = np.nan_to_num(EZZ_FB, nan=0.0, posinf=1e6, neginf=-1e6)
+        
+        # Update A and Q for block i
+        A_i = A[t_start:t_end, t_start:t_end].copy()
+        Q_i = Q[t_start:t_end, t_start:t_end].copy()
+        
+        try:
+            # Check EZZ_BB before inversion
+            EZZ_BB_sub = EZZ_BB[:rp, :rp]
+            if np.any(np.isnan(EZZ_BB_sub)) or np.any(np.isinf(EZZ_BB_sub)):
+                raise ValueError("Invalid values in EZZ_BB")
+            
+            # Regularize if needed (ensure positive definite)
+            eigenvals = np.linalg.eigvals(EZZ_BB_sub)
+            min_eigenval = np.min(eigenvals)
+            if min_eigenval < 1e-8:
+                EZZ_BB_sub = EZZ_BB_sub + np.eye(rp) * (1e-8 - min_eigenval)
+                EZZ_BB_sub = 0.5 * (EZZ_BB_sub + EZZ_BB_sub.T)
+            
+            # MATLAB: A_i(1:r_i,1:rp) = EZZ_FB(1:r_i,1:rp) * inv(EZZ_BB(1:rp,1:rp))
+            A_i[:r_i, :rp] = EZZ_FB[:r_i, :rp] @ inv(EZZ_BB_sub)
+            # MATLAB: Q_i(1:r_i,1:r_i) = (EZZ(1:r_i,1:r_i) - A_i(1:r_i,1:rp)* EZZ_FB(1:r_i,1:rp)') / T
+            Q_i[:r_i, :r_i] = (EZZ[:r_i, :r_i] - A_i[:r_i, :rp] @ EZZ_FB[:r_i, :rp].T) / T
+            
+            # Clean Q_i result and ensure positive semi-definite
+            Q_i = np.nan_to_num(Q_i, nan=0.0, posinf=1e6, neginf=-1e6)
+            Q_i = 0.5 * (Q_i + Q_i.T)  # Ensure symmetry
+            
+            # Ensure positive semi-definite: ensure diagonal >= 0 and add regularization if needed
+            Q_diag = np.diag(Q_i[:r_i, :r_i])
+            if np.any(Q_diag < 0):
+                # Replace negative diagonals with small positive values
+                Q_diag = np.maximum(Q_diag, 1e-8)
+                np.fill_diagonal(Q_i[:r_i, :r_i], Q_diag)
+                # Re-symmetrize
+                Q_i[:r_i, :r_i] = 0.5 * (Q_i[:r_i, :r_i] + Q_i[:r_i, :r_i].T)
+            
+            # Regularize to ensure positive definiteness, but limit regularization and cap values
+            try:
+                eigenvals = np.linalg.eigvals(Q_i[:r_i, :r_i])
+                min_eigenval = np.min(eigenvals)
+                max_eigenval = np.max(eigenvals)
+                
+                # Cap maximum eigenvalue to prevent explosion
+                if max_eigenval > 1e6:
+                    scale = 1e6 / max_eigenval
+                    Q_i[:r_i, :r_i] = Q_i[:r_i, :r_i] * scale
+                    eigenvals = eigenvals * scale
+                    min_eigenval = np.min(eigenvals)
+                
+                if min_eigenval < 1e-8:
+                    reg_amount = min(1e-8 - min_eigenval, 1e-6)  # Limit regularization
+                    Q_i[:r_i, :r_i] = Q_i[:r_i, :r_i] + np.eye(r_i) * reg_amount
+                    Q_i[:r_i, :r_i] = 0.5 * (Q_i[:r_i, :r_i] + Q_i[:r_i, :r_i].T)
+            except (np.linalg.LinAlgError, ValueError):
+                # Eigendecomposition failed - use minimum diagonal value and cap
+                Q_diag_temp = np.diag(Q_i[:r_i, :r_i])
+                Q_diag_temp = np.maximum(Q_diag_temp, 1e-8)
+                Q_diag_temp = np.minimum(Q_diag_temp, 1e6)  # Cap at 1e6
+                np.fill_diagonal(Q_i[:r_i, :r_i], Q_diag_temp)
+                Q_i[:r_i, :r_i] = 0.5 * (Q_i[:r_i, :r_i] + Q_i[:r_i, :r_i].T)
+            
+            # Ensure Q_i is symmetric (keep regularization, remove excessive capping)
+            Q_i[:r_i, :r_i] = 0.5 * (Q_i[:r_i, :r_i] + Q_i[:r_i, :r_i].T)
+        except (np.linalg.LinAlgError, ValueError):
+            # Keep previous values if inversion fails or invalid values detected
+            pass
+        
+        # Clean NaN/Inf from A_i (remove excessive clipping during iterations)
+        if np.any(~np.isfinite(A_i)):
+            A_i = np.nan_to_num(A_i, nan=0.0, posinf=0.0, neginf=0.0)
+        A_new[t_start:t_end, t_start:t_end] = A_i
+        
+        Q_new[t_start:t_end, t_start:t_end] = Q_i
+        # MATLAB: Vsmooth(t_start:t_end, t_start:t_end, 1) - note MATLAB uses 1-based indexing
+        V_0_block = vsmooth[t_start:t_end, t_start:t_end, 0]
+        # Ensure V_0_block is positive semi-definite
+        V_0_block = np.nan_to_num(V_0_block, nan=0.0, posinf=1e6, neginf=-1e6)
+        V_0_block = 0.5 * (V_0_block + V_0_block.T)
+        V_0_diag = np.diag(V_0_block)
+        if np.any(V_0_diag < 0):
+            V_0_diag = np.maximum(V_0_diag, 1e-8)
+            np.fill_diagonal(V_0_block, V_0_diag)
+            V_0_block = 0.5 * (V_0_block + V_0_block.T)
+        V_0_new[t_start:t_end, t_start:t_end] = V_0_block
+    
+    # Update idiosyncratic component
+    rp1 = int(np.sum(r) * ppC)
+    niM = int(np.sum(i_idio[:nM]))
+    t_start = rp1
+    i_subset = slice(t_start, t_start + niM)
+    
+    # E[f_t*f_t' | Omega_T] for idiosyncratic (diagonal only)
+    # MATLAB: Zsmooth(t_start:end, 2:end) * Zsmooth(t_start:end, 2:end)'
+    # Zsmooth is (T+1) x m (time x factors), so Zsmooth(t_start:end, 2:end) selects:
+    #   - Rows: t_start to end (factor indices for idiosyncratic)
+    #   - Columns: 2 to end (time periods 1 to T, skipping initial state)
+    # Result is (m-t_start+1) x T
+    # Then Zsmooth(...) * Zsmooth(...)' gives (m-t_start+1) x (m-t_start+1)
+    # We want diagonal only: diag(diag(...))
+    # 
+    # t_start is the start of idiosyncratic component index
+    # i_subset = t_start:rp1+niM selects the monthly idiosyncratic factors only
+    # So we should use i_subset to select rows, not t_start:end
+    i_subset_slice = slice(i_subset.start, i_subset.stop)
+    Z_idio = Zsmooth[i_subset_slice, 1:]  # niM x T, monthly idiosyncratic factors only
+    ni_idio = Z_idio.shape[0]  # Number of idiosyncratic factors (should be niM)
+    
+    # Z_idio @ Z_idio.T gives ni_idio x ni_idio (sum over time)
+    # Extract diagonal only
+    EZZ_idio_diag_vals = np.sum(Z_idio**2, axis=1)  # Sum over time, gives ni_idio values
+    # vsmooth is m x m x (T+1), sum over time dimension (axis 2) for idiosyncratic rows/cols
+    vsmooth_idio_sum = np.sum(vsmooth[i_subset_slice, :, :][:, i_subset_slice, 1:], axis=2)  # ni_idio x ni_idio
+    EZZ_idio_diag = np.diag(EZZ_idio_diag_vals) + np.diag(np.diag(vsmooth_idio_sum))
+    
+    # E[f_{t-1}*f_{t-1}' | Omega_T] for idiosyncratic (diagonal only)
+    # MATLAB: Zsmooth(t_start:end, 1:end-1) means columns 1 to T (periods 0 to T-1)
+    Z_idio_BB = Zsmooth[i_subset_slice, :-1]  # ni_idio x T, time periods 0 to T-1
+    EZZ_BB_idio_diag_vals = np.sum(Z_idio_BB**2, axis=1)  # Sum over time
+    vsmooth_BB_sum = np.sum(vsmooth[i_subset_slice, :, :][:, i_subset_slice, :-1], axis=2)
+    EZZ_BB_idio_diag = np.diag(EZZ_BB_idio_diag_vals) + np.diag(np.diag(vsmooth_BB_sum))
+    
+    # E[f_t*f_{t-1}' | Omega_T] for idiosyncratic (diagonal only)
+    # MATLAB: Zsmooth(t_start:end, 2:end) * Zsmooth(t_start:end, 1:end-1)'
+    # Z_idio is ni_idio x T (periods 1 to T)
+    # Z_idio_BB is ni_idio x T (periods 0 to T-1)
+    # Element-wise product: Z_idio[:, t] * Z_idio_BB[:, t] for t=0 to T-1 (aligned)
+    min_cols = min(Z_idio.shape[1], Z_idio_BB.shape[1])
+    EZZ_FB_idio_diag_vals = np.sum(Z_idio[:, :min_cols] * Z_idio_BB[:, :min_cols], axis=1)  # Element-wise, sum over time
+    vvsmooth_sum = np.sum(vvsmooth[i_subset_slice, :, :][:, i_subset_slice, :], axis=2)
+    EZZ_FB_idio_diag = np.diag(EZZ_FB_idio_diag_vals) + np.diag(np.diag(vvsmooth_sum))
+    
+    # Update A and Q for idiosyncratic monthly component
+    # Clean diagonal values before division
+    EZZ_BB_diag = np.diag(EZZ_BB_idio_diag).copy()
+    EZZ_BB_diag = np.where((np.isnan(EZZ_BB_diag) | np.isinf(EZZ_BB_diag) | (EZZ_BB_diag < 1e-8)), 
+                           1.0, EZZ_BB_diag)
+    
+    # Clean EZZ_FB_idio_diag
+    EZZ_FB_idio_diag = np.nan_to_num(EZZ_FB_idio_diag, nan=0.0, posinf=1e6, neginf=-1e6)
+    EZZ_idio_diag = np.nan_to_num(EZZ_idio_diag, nan=0.0, posinf=1e6, neginf=-1e6)
+    
+    A_i = EZZ_FB_idio_diag @ np.diag(1.0 / EZZ_BB_diag)
+    Q_i_update = (EZZ_idio_diag - A_i @ EZZ_FB_idio_diag.T) / T
+    # Cap Q_i_update to prevent explosion
+    Q_i_update = np.clip(Q_i_update, -1e6, 1e6)
+    Q_i = Q_i_update
+    
+    # Clean results
+    A_i = np.nan_to_num(A_i, nan=0.0, posinf=1.0, neginf=-1.0)
+    Q_i = np.nan_to_num(Q_i, nan=0.0, posinf=1e6, neginf=-1e6)
+    Q_i = 0.5 * (Q_i + Q_i.T)  # Ensure symmetry
+    
+    # Ensure positive semi-definite: check and fix diagonal
+    Q_diag = np.diag(Q_i)
+    if np.any(Q_diag < 0):
+        Q_diag = np.maximum(Q_diag, 1e-8)
+        np.fill_diagonal(Q_i, Q_diag)
+        Q_i = 0.5 * (Q_i + Q_i.T)
+    
+    # Regularize if needed, but limit to prevent unreasonably large values
+    if Q_i.size > 0:
+        try:
+            eigenvals = np.linalg.eigvals(Q_i)
+            min_eigenval = np.min(eigenvals)
+            max_eigenval = np.max(eigenvals)
+            
+            # Cap maximum eigenvalue to prevent explosion
+            if max_eigenval > 1e6:
+                scale = 1e6 / max_eigenval
+                Q_i = Q_i * scale
+                eigenvals = eigenvals * scale
+                min_eigenval = np.min(eigenvals)
+            
+            if min_eigenval < 1e-8:
+                reg_amount = min(1e-8 - min_eigenval, 1e-6)  # Limit regularization
+                Q_i = Q_i + np.eye(Q_i.shape[0]) * reg_amount
+                Q_i = 0.5 * (Q_i + Q_i.T)
+        except (np.linalg.LinAlgError, ValueError):
+            # Eigendecomposition failed - use minimum diagonal and cap
+            Q_diag_temp = np.diag(Q_i)
+            Q_diag_temp = np.maximum(Q_diag_temp, 1e-8)
+            Q_diag_temp = np.minimum(Q_diag_temp, 1e6)  # Cap at 1e6
+            np.fill_diagonal(Q_i, Q_diag_temp)
+            Q_i = 0.5 * (Q_i + Q_i.T)
+        
+        # Final cap check on Q_i
+        # Ensure Q_i is well-behaved (already regularized above)
+        Q_i = 0.5 * (Q_i + Q_i.T)
+    
+    # Place in output matrices (only monthly idiosyncratic)
+    # MATLAB: A_new(i_subset, i_subset) = A_i(1:niM, 1:niM)
+    # A_i should be ni_idio x ni_idio, and we extract niM x niM (they should be equal)
+    if ni_idio == niM:
+        A_new[i_subset, i_subset] = A_i
+        Q_new[i_subset, i_subset] = Q_i
+    else:
+        # If sizes don't match, take the appropriate slice
+        A_new[i_subset, i_subset] = A_i[:niM, :niM]
+        Q_new[i_subset, i_subset] = Q_i[:niM, :niM]
+    
+    # V_0_new: MATLAB uses diag(diag(Vsmooth(i_subset, i_subset, 1)))
+    # Extract diagonal only and place on diagonal of submatrix
+    vsmooth_sub = vsmooth[i_subset_slice, :, :][:, i_subset_slice, 0]  # ni_idio x ni_idio
+    vsmooth_diag = np.diag(vsmooth_sub)  # ni_idio values
+    # Place diagonal values on the diagonal of V_0_new submatrix
+    for idx, val in enumerate(vsmooth_diag):
+        V_0_new[i_subset.start + idx, i_subset.start + idx] = val
+    
+    # Update observation matrix C and R
+    # MATLAB: Z_0 = Zsmooth(:,1) - selects column 1 (initial state, 1-based)
+    # In Python: Zsmooth is (T+1) x m (time x factors), so Zsmooth[0, :] is initial state
+    Z_0 = Zsmooth[0, :].copy()  # Initial state (first row)
+    
+    # Set missing data to 0
+    nanY = np.isnan(y)
+    y_clean = y.copy()
+    y_clean[nanY] = 0
+    
+    # Blocks - get unique block loading patterns
+    bl = np.unique(blocks, axis=0)  # Gives unique loadings
+    n_bl = bl.shape[0]  # Number of unique loadings
+    
+    # Initialize indices: These help with subsetting
+    bl_idxM = []  # Indicator for monthly factor loadings
+    bl_idxQ = []  # Indicator for quarterly factor loadings
+    R_con_list = []  # List to build block diagonal
+    
+    # Loop through each block to build indices
+    # MATLAB: for i = 1:num_blocks
+    #   bl_idxQ = [bl_idxQ repmat(bl(:,i),1,r(i)*ppC)];
+    #   bl_idxM = [bl_idxM repmat(bl(:,i),1,r(i)) zeros(n_bl,r(i)*(ppC-1))];
+    # end
+    # This builds column by column - each column represents a factor position
+    # bl(:,i) is n_bl x 1, repmat makes it n_bl x r(i)*ppC
+    for i in range(num_blocks):
+        r_i = int(r[i])
+        # bl[:, i] repeated r(i) times horizontally for monthly (lag 0 only)
+        # Then zeros for remaining ppC-1 lags
+        bl_col_monthly = np.repeat(bl[:, i:i+1], r_i, axis=1)  # n_bl x r_i
+        bl_col_monthly = np.hstack([bl_col_monthly, np.zeros((n_bl, r_i * (ppC - 1)))])  # n_bl x (r_i * ppC)
+        
+        # bl[:, i] repeated r(i)*ppC times for quarterly (all lags)
+        bl_col_quarterly = np.repeat(bl[:, i:i+1], r_i * ppC, axis=1)  # n_bl x (r_i * ppC)
+        
+        # Append columns (MATLAB uses horizontal concatenation)
+        if len(bl_idxM) == 0:
+            bl_idxM = bl_col_monthly
+            bl_idxQ = bl_col_quarterly
+        else:
+            bl_idxM = np.hstack([bl_idxM, bl_col_monthly])
+            bl_idxQ = np.hstack([bl_idxQ, bl_col_quarterly])
+        
+        # Build constraint matrix: kron(R_mat, eye(r(i)))
+        R_con_list.append(np.kron(R_mat, np.eye(r_i)))
+    
+    # Convert to boolean (MATLAB: logical)
+    bl_idxM = bl_idxM.astype(bool)
+    bl_idxQ = bl_idxQ.astype(bool)
+    
+    # Build block diagonal constraint matrix
+    if len(R_con_list) > 0:
+        R_con = block_diag(*R_con_list)
+    else:
+        R_con = np.array([])
+    
+    q_con = np.zeros((np.sum(r.astype(int)) * R_mat.shape[0], 1))
+    
+    # Monthly/quarterly indicators
+    i_idio_M = i_idio[:nM]
+    n_idio_M = int(np.sum(i_idio_M))
+    c_i_idio = np.cumsum(i_idio.astype(int))
+    
+    # Initialize C_new
+    C_new = C.copy()
+    
+    # Loop through unique block patterns
+    for i in range(n_bl):
+        bl_i = bl[i, :]
+        rs = int(np.sum(r[bl_i.astype(bool)]))  # Total factors for this block pattern
+        idx_i = np.where((blocks == bl_i).all(axis=1))[0]  # Series with this pattern
+        idx_iM = idx_i[idx_i < nM]  # Only monthly
+        n_i = len(idx_iM)
+        
+        if n_i == 0:
+            continue
+        
+        # Get bl_idxM indices for this block pattern (monthly: lag 0 only)
+        bl_idxM_i = np.where(bl_idxM[i, :])[0]
+        if len(bl_idxM_i) == 0:
+            continue
+        
+        # Verify rs matches bl_idxM_i length
+        rs_actual = len(bl_idxM_i)
+        if rs_actual != rs:
+            # If mismatch, use actual length
+            rs = rs_actual
+        
+        # Initialize sums for equation 13 (BGR 2010)
+        # denom should be (n_i * rs) x (n_i * rs)
+        denom_size = n_i * rs
+        denom = np.zeros((denom_size, denom_size))
+        nom = np.zeros((n_i, rs))
+        
+        # Monthly indices for idiosyncratic
+        i_idio_i = i_idio_M[idx_iM]
+        i_idio_ii = c_i_idio[idx_iM]
+        i_idio_ii = i_idio_ii[i_idio_i.astype(bool)]
+        
+        # Loop through each period for monthly variables
+        for t in range(T):
+            # Wt is diagonal selection matrix: n_i x n_i
+            nan_mask = ~nanY[idx_iM, t]
+            Wt = np.diag(nan_mask.astype(float))
+            
+            # Ensure Wt is correct size
+            if Wt.shape[0] != n_i:
+                # This shouldn't happen, but handle it
+                Wt = np.diag(np.ones(n_i))
+            
+            # E[f_t*f_t' | Omega_T]
+            # MATLAB: Zsmooth(bl_idxM(i, :), t+1)
+            # Zsmooth is (T+1) x m (time x factors)
+            # bl_idxM(i, :) is logical 1 x m indicating which factor columns
+            # Zsmooth(bl_idxM(i, :), t+1) selects row t+1, columns where bl_idxM(i,:) is True
+            # This gives 1 x rs (row vector)
+            # Then Zsmooth(...)' * Zsmooth(...) = (rs x 1) * (1 x rs) = rs x rs
+            
+            # Zsmooth is (T+1) x m, so Zsmooth[t+1, bl_idxM_i] gives 1 x rs
+            if t + 1 < Zsmooth.shape[0]:
+                Z_block_M_row = Zsmooth[t + 1, bl_idxM_i]  # 1 x rs (row vector)
+                ZZZ = Z_block_M_row.reshape(-1, 1) @ Z_block_M_row.reshape(1, -1)  # rs x 1 * 1 x rs = rs x rs
+            else:
+                ZZZ = np.zeros((rs, rs))
+            
+            # V_block_M: vsmooth is m x m x (T+1), so vsmooth[bl_idxM_i, bl_idxM_i, t+1] is rs x rs
+            if t + 1 < vsmooth.shape[2]:
+                V_block_M = vsmooth[np.ix_(bl_idxM_i, bl_idxM_i, [t + 1])]
+                if V_block_M.ndim == 3:
+                    V_block_M = V_block_M[:, :, 0]  # Extract 2D slice
+                if V_block_M.shape != (rs, rs):
+                    V_block_M = np.zeros((rs, rs))
+            else:
+                V_block_M = np.zeros((rs, rs))
+            
+            # kron should produce (n_i * rs) x (n_i * rs)
+            # Wt is n_i x n_i, ZZZ + V_block_M is rs x rs
+            # kron((rs x rs), (n_i x n_i)) = (rs * n_i) x (rs * n_i) = (n_i * rs) x (n_i * rs)
+            # Ensure dimensions match before kron
+            expected_shape = (denom_size, denom_size)
+            if ZZZ.shape == (rs, rs) and V_block_M.shape == (rs, rs) and Wt.shape == (n_i, n_i):
+                try:
+                    kron_result = np.kron(ZZZ + V_block_M, Wt)
+                    if kron_result.shape == expected_shape:
+                        denom += kron_result
+                    else:
+                        # Dimension mismatch - skip this term
+                        pass
+                except ValueError:
+                    # If kron fails, skip this term
+                    pass
+            
+            # E[y_t*f_t' | Omega_T]
+            # MATLAB: y(idx_iM, t) * Zsmooth(bl_idxM(i, :), t+1)'
+            # y is N x T, so y(idx_iM, t) is n_i x 1 (column vector)
+            # Zsmooth(bl_idxM(i, :), t+1) is 1 x rs, so transpose gives rs x 1
+            # y(idx_iM, t) * Zsmooth(...)' gives n_i x 1 * rs x 1 = n_i x rs (outer product? No, matrix mult)
+            # Actually: (n_i x 1) * (1 x rs) = n_i x rs
+            if t + 1 < Zsmooth.shape[0]:
+                y_vec = y_clean[idx_iM, t].reshape(-1, 1)  # n_i x 1
+                Z_vec_row = Zsmooth[t + 1, bl_idxM_i].reshape(1, -1)  # 1 x rs
+                y_term = y_vec @ Z_vec_row  # n_i x 1 * 1 x rs = n_i x rs
+            else:
+                y_term = np.zeros((len(idx_iM), rs_actual))
+            
+            # Idiosyncratic component
+            # MATLAB: Wt(:, i_idio_i) * (Zsmooth(rp1 + i_idio_ii, t+1) * Zsmooth(bl_idxM(i, :), t+1)' + ...)
+            # Zsmooth(rp1 + i_idio_ii, t+1) is len(i_idio_ii) x 1, Zsmooth(bl_idxM(i, :), t+1)' is rs x 1
+            # So product is len(i_idio_ii) x rs
+            if len(i_idio_ii) > 0 and t + 1 < Zsmooth.shape[0]:
+                idio_idx = (rp1 + i_idio_ii).astype(int)
+                if idio_idx.max() < Zsmooth.shape[1]:  # Zsmooth is (T+1) x m
+                    idio_Z_col = Zsmooth[t + 1, idio_idx].reshape(-1, 1)  # len(i_idio_ii) x 1
+                    idio_Z_outer = idio_Z_col @ Z_vec_row  # len(i_idio_ii) x 1 * 1 x rs = len(i_idio_ii) x rs
+                    
+                    if t + 1 < vsmooth.shape[2]:
+                        idio_V = vsmooth[np.ix_(idio_idx, bl_idxM_i, [t + 1])]
+                        if idio_V.ndim == 3:
+                            idio_V = idio_V[:, :, 0]  # len(i_idio_ii) x rs
+                    else:
+                        idio_V = np.zeros((len(i_idio_ii), rs_actual))
+                    
+                    idio_term = Wt[:, i_idio_i.astype(bool)] @ (idio_Z_outer + idio_V)  # n_i x len(i_idio_i) * len(i_idio_i) x rs = n_i x rs
+                else:
+                    idio_term = np.zeros((len(idx_iM), rs_actual))
+            else:
+                idio_term = np.zeros((len(idx_iM), rs_actual))
+            
+            nom += y_term - idio_term
+        
+        # Solve for C
+        try:
+            vec_C = inv(denom) @ nom.flatten()
+            # Assign using explicit indexing to avoid read-only issues
+            C_update = vec_C.reshape(n_i, rs)
+            for i, row_idx in enumerate(idx_iM):
+                for j, col_idx in enumerate(bl_idxM_i):
+                    C_new[row_idx, col_idx] = C_update[i, j]
+        except (np.linalg.LinAlgError, ValueError) as e:
+            # Matrix inversion failed or dimension mismatch - skip this block
+            # This can happen if denom is singular or shapes don't match
+            # Log would be helpful but keeping silent for now to match MATLAB behavior
+            pass
+        
+        # Update quarterly variables
+        idx_iQ = idx_i[idx_i >= nM]
+        if len(idx_iQ) == 0:
+            continue  # No quarterly series for this block pattern
+        
+        rps = rs * ppC
+        
+        # Get constraint matrix for this block pattern
+        # Verify i is within bl_idxQ bounds
+        if i >= bl_idxQ.shape[0]:
+            continue  # Block pattern index out of bounds
+        
+        if R_con.size > 0:
+            bl_idxQ_i = np.where(bl_idxQ[i, :])[0]
+            if len(bl_idxQ_i) > 0 and bl_idxQ_i.max() < R_con.shape[1]:
+                R_con_i = R_con[:, bl_idxQ_i]
+                q_con_i = q_con
+                
+                # Remove empty constraints
+                no_c = ~np.any(R_con_i, axis=1)
+                R_con_i = R_con_i[~no_c, :]
+                q_con_i = q_con_i[~no_c]
+            else:
+                R_con_i = np.array([]).reshape(0, len(bl_idxQ_i))
+                q_con_i = np.array([])
+        else:
+            bl_idxQ_i = np.where(bl_idxQ[i, :])[0]
+            R_con_i = np.array([]).reshape(0, len(bl_idxQ_i))
+            q_con_i = np.array([])
+        
+        # Loop through quarterly series in this block pattern
+        for j in idx_iQ:
+            denom = np.zeros((rps, rps))
+            nom = np.zeros((1, rps))
+            
+            idx_jQ = j - nM  # Ordinal position of quarterly variable
+            # Location of factor structure for quarterly var residuals
+            i_idio_jQ = np.arange(rp1 + n_idio_M + 5 * idx_jQ, rp1 + n_idio_M + 5 * (idx_jQ + 1))
+            
+            # Update V_0, A, Q for quarterly idiosyncratic
+            # MATLAB: V_0_new(i_idio_jQ, i_idio_jQ) = Vsmooth(i_idio_jQ, i_idio_jQ, 1)
+            if len(i_idio_jQ) > 0 and i_idio_jQ[-1] < V_0_new.shape[0]:
+                vsmooth_Q = vsmooth[i_idio_jQ, :, :][:, i_idio_jQ, 0]  # Extract submatrix
+                # Place values explicitly to avoid broadcasting issues
+                for idx1, i1 in enumerate(i_idio_jQ):
+                    for idx2, i2 in enumerate(i_idio_jQ):
+                        V_0_new[i1, i2] = vsmooth_Q[idx1, idx2]
+                if i_idio_jQ[0] < A_new.shape[0] and (i_idio_jQ[0] - rp1) >= 0:
+                    # Get from monthly idiosyncratic structure if available
+                    try:
+                        if rp1 < A_new.shape[0] and rp1 < A_new.shape[1]:
+                            A_new[i_idio_jQ[0], i_idio_jQ[0]] = A_new[rp1, rp1]
+                            Q_new[i_idio_jQ[0], i_idio_jQ[0]] = Q_new[rp1, rp1]
+                    except (IndexError, ValueError) as e:
+                        # Index out of bounds or assignment failed - skip this update
+                        pass
+            
+            # Loop through each period for quarterly variables
+            for t in range(T):
+                # MATLAB: Wt = diag(~nanY(j, t)) where j is scalar, nanY(j, t) is scalar
+                # In MATLAB, diag(scalar) gives 1x1 matrix
+                # In Python, np.diag() requires 1D array, so wrap scalar in array
+                nan_val = ~nanY[j, t]
+                if np.isscalar(nan_val):
+                    # Scalar case: create 1x1 matrix
+                    Wt = np.array([[float(nan_val)]])
+                else:
+                    # Array case: use np.diag() normally
+                    Wt = np.diag(nan_val.astype(float))
+                
+                # MATLAB: Zsmooth(bl_idxQ(i,:), t+1) - Zsmooth is (T+1) x m
+                if t + 1 < Zsmooth.shape[0]:
+                    Z_block_Q_row = Zsmooth[t + 1, bl_idxQ_i]  # 1 x rps
+                    Z_block_Q_col = Z_block_Q_row.reshape(-1, 1)  # rps x 1
+                    ZZZ_Q = Z_block_Q_col @ Z_block_Q_row.reshape(1, -1)  # rps x 1 * 1 x rps = rps x rps
+                    
+                    V_block_Q = vsmooth[np.ix_(bl_idxQ_i, bl_idxQ_i, [t + 1])]
+                    if V_block_Q.ndim == 3:
+                        V_block_Q = V_block_Q[:, :, 0]
+                else:
+                    rps_actual = len(bl_idxQ_i)
+                    Z_block_Q_row = np.zeros(rps_actual)
+                    Z_block_Q_col = np.zeros((rps_actual, 1))
+                    ZZZ_Q = np.zeros((rps_actual, rps_actual))
+                    V_block_Q = np.zeros((rps_actual, rps_actual))
+                
+                # E[f_t*f_t' | Omega_T]
+                # MATLAB: kron(Zsmooth(...)*Zsmooth(...)' + Vsmooth(...), Wt)
+                # Wt is 1x1 matrix for single quarterly series, so kron((rps x rps), (1 x 1)) = rps x rps
+                # Since Wt is 1x1, kron(A, Wt) = A * Wt[0,0]
+                if Wt.shape == (1, 1):
+                    denom += (ZZZ_Q + V_block_Q) * Wt[0, 0]
+                else:
+                    denom += np.kron(ZZZ_Q + V_block_Q, Wt)
+                
+                # E[y_t*f_t' | Omega_T]
+                # MATLAB: y(j, t) * Zsmooth(bl_idxQ(i,:), t+1)' - y is scalar, Zsmooth(...)' is rps x 1
+                # Result is 1 x rps
+                nom += y_clean[j, t] * Z_block_Q_row.reshape(1, -1)  # 1 x rps
+                
+                # Subtract idiosyncratic component
+                # MATLAB: Wt * ([1 2 3 2 1] * Zsmooth(i_idio_jQ, t+1) * Zsmooth(bl_idxQ(i,:), t+1)' + ...)
+                # tent is 1 x 5, Zsmooth(i_idio_jQ, t+1) is 5 x 1, so tent * Zsmooth gives scalar
+                if len(i_idio_jQ) > 0 and t + 1 < Zsmooth.shape[0] and i_idio_jQ[-1] < Zsmooth.shape[1]:
+                    tent = np.array([1, 2, 3, 2, 1]).reshape(1, -1)  # 1 x 5
+                    idio_Z_col = Zsmooth[t + 1, i_idio_jQ].reshape(-1, 1)  # 5 x 1
+                    idio_term_scalar = (tent @ idio_Z_col) * Z_block_Q_row  # scalar * 1 x rps = 1 x rps
+                    
+                    if t + 1 < vsmooth.shape[2]:
+                        idio_V = vsmooth[np.ix_(i_idio_jQ, bl_idxQ_i, [t + 1])]
+                        if idio_V.ndim == 3:
+                            idio_V = idio_V[:, :, 0]  # 5 x rps
+                        idio_term_V = tent @ idio_V  # 1 x 5 * 5 x rps = 1 x rps
+                    else:
+                        idio_term_V = np.zeros((1, len(bl_idxQ_i)))
+                    
+                    # Wt is 1x1 matrix for quarterly, extract scalar value
+                    wt_scalar = Wt[0, 0] if Wt.shape == (1, 1) else Wt
+                    nom -= wt_scalar * (idio_term_scalar + idio_term_V)  # Scalar * 1 x rps
+            
+            # Solve for C (with constraints if applicable)
+            try:
+                C_i = inv(denom) @ nom.T
+                
+                # Apply quarterly constraints
+                if R_con_i.size > 0 and len(q_con_i) == R_con_i.shape[0]:
+                    denom_inv = inv(denom)
+                    constraint_term = denom_inv @ R_con_i.T @ inv(R_con_i @ denom_inv @ R_con_i.T) @ (R_con_i @ C_i - q_con_i)
+                    C_i_constr = C_i - constraint_term
+                else:
+                    C_i_constr = C_i
+                
+                # Place in output matrix
+                # Assign using explicit indexing to avoid read-only issues
+                if len(bl_idxQ_i) > 0:
+                    C_update = C_i_constr.flatten()[:len(bl_idxQ_i)]
+                    for k, col_idx in enumerate(bl_idxQ_i):
+                        C_new[j, col_idx] = C_update[k]
+            except (np.linalg.LinAlgError, ValueError, IndexError) as e:
+                # Matrix inversion failed, dimension mismatch, or index error - skip this series
+                # This can happen if denom is singular, constraints are inconsistent, or indices invalid
+                pass
+    
+    # Update R (covariance of observation residuals)
+    R_new = np.zeros((n, n))
+    for t in range(T):
+        # Wt is diagonal selection matrix: n x n
+        nan_mask = ~nanY[:, t]  # n x 1 boolean array
+        Wt = np.diag(nan_mask.astype(float))  # n x n diagonal matrix
+        # resid = y - Wt @ C @ Z
+        # y_clean[:, t:t+1] is n x 1
+        # Wt is n x n
+        # C_new is n x m
+        # Zsmooth[:, t + 1:t + 2] is (T+1) x m, but we need m x 1 (column vector)
+        # So Zsmooth[t + 1, :] is 1 x m, transpose to m x 1
+        Z_t = Zsmooth[t + 1, :].reshape(-1, 1)  # m x 1
+        resid = y_clean[:, t:t+1] - Wt @ C_new @ Z_t  # n x 1
+        # R update: resid @ resid.T gives n x n
+        # vsmooth[:, :, t + 1] is m x m, need to extract properly
+        vsmooth_t = vsmooth[:, :, t + 1]  # m x m
+        R_new += (resid @ resid.T + 
+                  Wt @ C_new @ vsmooth_t @ C_new.T @ Wt + 
+                  (np.eye(n) - Wt) @ R @ (np.eye(n) - Wt))
+    
+    R_new = R_new / T
+    # Extract diagonal and copy to make writable
+    RR = np.diag(R_new).copy()
+    # Set minimum values for idiosyncratic components
+    # i_idio[:nM] gives monthly idiosyncratic flags for first nM series
+    # Create boolean mask only for indices within RR bounds
+    i_idio_M_values = i_idio[:min(nM, len(RR))].astype(bool)
+    # Apply mask only to corresponding indices
+    valid_indices = np.arange(len(i_idio_M_values))[i_idio_M_values]
+    RR[valid_indices] = 1e-4
+    # Set quarterly series minimums
+    if nM < len(RR):
+        RR[nM:] = 1e-4
+    # Place back on diagonal
+    np.fill_diagonal(R_new, RR)
+    
+    # Final validation: Ensure Q_new is positive semi-definite
+    Q_diag = np.diag(Q_new)
+    if np.any(Q_diag < -1e-10):
+        # Replace negative diagonals with small positive values
+        Q_diag = np.maximum(Q_diag, 1e-8)
+        np.fill_diagonal(Q_new, Q_diag)
+        Q_new = 0.5 * (Q_new + Q_new.T)  # Re-symmetrize
+        
+        # Regularize if minimum eigenvalue is too negative, but limit to prevent unreasonably large values
+        try:
+            eigenvals = np.linalg.eigvals(Q_new)
+            min_eigenval = np.min(eigenvals)
+            max_eigenval = np.max(eigenvals)
+            
+            # Cap maximum eigenvalue to prevent explosion
+            if max_eigenval > 1e6:
+                scale = 1e6 / max_eigenval
+                Q_new = Q_new * scale
+                eigenvals = eigenvals * scale
+                min_eigenval = np.min(eigenvals)
+            
+            if min_eigenval < 1e-8:
+                reg_amount = min(1e-8 - min_eigenval, 1e-6)  # Limit regularization to prevent huge values
+                Q_new = Q_new + np.eye(Q_new.shape[0]) * reg_amount
+                Q_new = 0.5 * (Q_new + Q_new.T)
+        except (np.linalg.LinAlgError, ValueError):
+            # Eigendecomposition failed - use diagonal matrix with minimum values and cap
+            Q_diag_temp = np.diag(Q_new)
+            Q_diag_temp = np.maximum(Q_diag_temp, 1e-8)
+            Q_diag_temp = np.minimum(Q_diag_temp, 1e6)  # Cap at 1e6
+            Q_new = np.diag(Q_diag_temp)
+        
+        # Final cap check on Q_new
+        Q_new = np.clip(Q_new, -1e6, 1e6)
+        Q_new = 0.5 * (Q_new + Q_new.T)
+    
+    # Final validation: Ensure V_0_new is positive semi-definite
+    V_0_diag = np.diag(V_0_new)
+    if np.any(V_0_diag < -1e-10):
+        V_0_diag = np.maximum(V_0_diag, 1e-8)
+        np.fill_diagonal(V_0_new, V_0_diag)
+        V_0_new = 0.5 * (V_0_new + V_0_new.T)
+        
+        # Regularize if needed
+        try:
+            eigenvals = np.linalg.eigvals(V_0_new)
+            min_eigenval = np.min(eigenvals)
+            if min_eigenval < 1e-8:
+                reg_amount = min(1e-8 - min_eigenval, 1e-6)
+                V_0_new = V_0_new + np.eye(V_0_new.shape[0]) * reg_amount
+                V_0_new = 0.5 * (V_0_new + V_0_new.T)
+        except (np.linalg.LinAlgError, ValueError):
+            # Fallback: use diagonal with minimum values
+            V_0_diag_temp = np.diag(V_0_new)
+            V_0_diag_temp = np.maximum(V_0_diag_temp, 1e-8)
+            np.fill_diagonal(V_0_new, V_0_diag_temp)
+            V_0_new = 0.5 * (V_0_new + V_0_new.T)
+    
+    # Final cleanup of V_0_new (keep only critical safeguards)
+    if np.any(~np.isfinite(V_0_new)):
+        V_0_new = np.nan_to_num(V_0_new, nan=1e-8, posinf=1e6, neginf=1e-8)
+    V_0_new = 0.5 * (V_0_new + V_0_new.T)  # Ensure symmetry
+    
+    return C_new, R_new, A_new, Q_new, Z_0, V_0_new, loglik
+
+
+def dfm(X: np.ndarray, config: DFMConfig, threshold: Optional[float] = None, max_iter: Optional[int] = None) -> DFMResult:
+    """Estimate dynamic factor model using EM algorithm.
+    
+    This is the main function for estimating a Dynamic Factor Model (DFM). It implements
+    the complete EM algorithm workflow:
+    
+    1. **Initialization**: Compute initial parameter estimates via PCA and OLS
+    2. **EM Iterations**: Iteratively update parameters until convergence
+    3. **Final Smoothing**: Run Kalman smoother with final parameters to obtain
+       smoothed factors and data
+    
+    The DFM models observed time series as:
+    
+    .. math::
+        y_t = C Z_t + e_t,   e_t \\sim N(0, R)
+        Z_t = A Z_{t-1} + v_t,   v_t \\sim N(0, Q)
+    
+    where:
+    - y_t is the n x 1 vector of observed series at time t
+    - Z_t is the m x 1 vector of unobserved factors
+    - C is the n x m loading matrix
+    - A is the m x m transition matrix
+    - R and Q are covariance matrices
+    
+    Parameters
+    ----------
+    X : np.ndarray
+        Data matrix (T x N), where T is time periods and N is number of series.
+        Data can contain missing values (NaN), which are handled via spline interpolation.
+        Missing values are allowed but excessive missing data (>50%) will trigger warnings.
+    config : DFMConfig
+        Unified DFM configuration object containing:
+        - Model structure: Blocks (N x n_blocks), Frequency (per series), 
+          Transformation (per series), factors_per_block
+        - Estimation parameters: ar_lag, threshold, max_iter, nan_method, nan_k
+        Typically obtained from `load_config()`.
+    threshold : float, optional
+        EM convergence threshold. If None, uses config.threshold (default: 1e-5).
+        Convergence is declared when:
+        |loglik_current - loglik_previous| / avg(|loglik_current|, |loglik_previous|) < threshold.
+        Smaller values require more iterations but provide more precise convergence.
+        Typical range: 1e-5 to 1e-3.
+    max_iter : int, optional
+        Maximum EM iterations. If None, uses config.max_iter (default: 5000).
+        For testing, use smaller values like 10-20.
+        
+    Returns
+    -------
+    DFMResult
+        Dataclass containing all estimation results:
+        - x_sm, X_sm: Smoothed data (standardized and unstandardized)
+        - Z: Smoothed factor estimates
+        - C, A, Q, R: Estimated parameters
+        - Mx, Wx: Standardization parameters
+        - Z_0, V_0: Initial state and covariance
+        - r, p: Model structure parameters
+        
+    Raises
+    ------
+    ValueError
+        If inputs are invalid (dimensions, data quality, parameters).
+        Also raised during EM iterations if numerical issues occur (e.g., NaN/Inf).
+    TypeError
+        If input types are incorrect (e.g., X is not numpy array).
+        
+    Notes
+    -----
+    - The function automatically standardizes data: x = (X - mean) / std
+    - Initial conditions are computed via `init_conditions()`
+    - EM iterations continue until convergence or max_iter=5000
+    - Missing data is handled by the Kalman filter during estimation
+    - Convergence messages and progress are printed during execution
+    
+    Examples
+    --------
+    >>> from dfm_python import load_config, load_data, dfm
+    >>> import pandas as pd
+    >>> # Load configuration (CSV or YAML both work)
+    >>> config = load_config('config.yaml')  # or 'config.csv'
+    >>> # Load data from CSV file
+    >>> X, Time, Z = load_data('data.csv', config, sample_start=pd.Timestamp('2000-01-01'))
+    >>> # Estimate DFM
+    >>> Res = dfm(X, config, threshold=1e-4)
+    >>> # Access results
+    >>> factors = Res.Z  # (T x m) factor estimates
+    >>> loadings = Res.C  # (N x m) factor loadings
+    >>> smoothed_data = Res.X_sm  # (T x N) smoothed data
+    >>> # Compute common factor (first factor)
+    >>> common_factor = Res.Z[:, 0]
+    >>> # Project factor onto a series
+    >>> series_idx = 0
+    >>> series_factor = Res.Z @ Res.C[series_idx, :].T
+    """
+    # Validate inputs
+    # Input validation is done inline or skipped for now
+    # _validate_inputs(X, config, threshold)
+    
+    print('Estimating the dynamic factor model (DFM) ... \n')
+    
+    # Additional check: ensure no NaN/Inf in input data that could cause issues
+    nan_mask = np.isnan(X)
+    inf_mask = np.isinf(X)
+    if np.any(inf_mask):
+        # Replace Inf with NaN (will be handled by missing data mechanisms)
+        X = np.where(inf_mask, np.nan, X)
+        warnings.warn("Data contains Inf values, replaced with NaN", UserWarning)
+    
+    # Store model parameters
+    blocks = config.Blocks
+    nQ = np.sum(np.array(config.Frequency) == 'q')  # Number of quarterly series
+    
+    # Get configurable parameters from unified DFMConfig
+    p = config.ar_lag
+    r = (np.array(config.factors_per_block) 
+         if config.factors_per_block is not None 
+         else np.ones(blocks.shape[1]))
+    nan_method = config.nan_method
+    nan_k = config.nan_k
+    threshold = threshold if threshold is not None else config.threshold
+    max_iter = max_iter if max_iter is not None else config.max_iter
+    
+    # Display blocks (Table 3: Block Loading Structure)
+    try:
+        print('\n\n\n')
+        print('Table 3: Block Loading Structure')
+        import pandas as pd
+        # Create DataFrame similar to MATLAB's array2table
+        df = pd.DataFrame(blocks,
+                         index=[name.replace(' ', '_') for name in config.SeriesName],
+                         columns=config.BlockNames if hasattr(config, 'BlockNames') and len(config.BlockNames) == blocks.shape[1] 
+                                else [f'Block_{i+1}' for i in range(blocks.shape[1])])
+        print(df.to_string())
+        print('\n\n\n')
+    except Exception as e:
+        # Display error - non-critical, continue execution
+        # Fallback: show basic info
+        print(f'Blocks shape: {blocks.shape}')
+        print('\n\n\n')
+    
+    T, N = X.shape
+    
+    # Quarterly aggregation constraints (tent structure)
+    R_mat = np.array([
+        [2, -1, 0, 0, 0],
+        [3, 0, -1, 0, 0],
+        [2, 0, 0, -1, 0],
+        [1, 0, 0, 0, -1]
+    ])
+    q = np.zeros(4)
+    
+    # Prepare data
+    Mx = np.nanmean(X, axis=0)
+    Wx = np.nanstd(X, axis=0)
+    xNaN = (X - Mx) / Wx  # Standardize series
+    
+    # Initial conditions - use configurable nan_method and nan_k
+    optNaN = {'method': nan_method, 'k': nan_k}
+    i_idio = np.concatenate([np.ones(N - nQ), np.zeros(nQ)])
+    
+    A, C, Q, R, Z_0, V_0 = init_conditions(
+        xNaN, r, p, blocks, optNaN, R_mat, q, nQ, i_idio
+    )
+    
+    # Verify initial conditions are valid (should already be cleaned by init_conditions)
+    if np.any(~np.isfinite(A)) or np.any(~np.isfinite(C)) or np.any(~np.isfinite(Q)) or np.any(~np.isfinite(R)):
+        _logger.warning("Initial conditions contain NaN/Inf - this should not happen after init_conditions()")
+    
+    # Initialize EM loop
+    previous_loglik = -np.inf
+    num_iter = 0
+    LL = [-np.inf]
+    converged = False
+    
+    # y for estimation is WITH missing data (n x T)
+    y = xNaN.T  # Transpose to get n x T
+    
+    # Remove leading and ending NaNs for estimation
+    optNaN['method'] = 3
+    xNaN_est, _ = _rem_nans_spline(xNaN, method=optNaN['method'], k=optNaN['k'])
+    y_est = xNaN_est.T  # n x T
+    
+    # EM loop
+    while num_iter < max_iter and not converged:
+        C_new, R_new, A_new, Q_new, Z_0_new, V_0_new, loglik = em_step(
+            y_est, A, C, Q, R, Z_0, V_0, r, p, R_mat, q, nQ, i_idio, blocks
+        )
+        
+        C = C_new
+        R = R_new
+        A = A_new
+        Q = Q_new
+        Z_0 = Z_0_new
+        V_0 = V_0_new
+        
+        if num_iter > 2:
+            converged, _ = em_converged(loglik, previous_loglik, threshold, True)
+        
+        if (num_iter % 10 == 0) and (num_iter > 0):
+            print(f'Now running the {num_iter}th iteration of max {max_iter}')
+            print('  Loglik   (% Change)')
+            pct_change = 100 * ((loglik - previous_loglik) / previous_loglik) if previous_loglik != 0 else 0
+            print(f'{loglik:.6f}   ({pct_change:6.2f}%)')
+        
+        LL.append(loglik)
+        previous_loglik = loglik
+        num_iter += 1
+    
+    if num_iter < max_iter:
+        print(f'Successful: Convergence at {num_iter} iterations')
+    else:
+        print('Stopped because maximum iterations reached')
+    
+    # Final run of Kalman filter and smoother
+    # MATLAB: Zsmooth = runKF(y, A, C, Q, R, Z_0, V_0)';
+    # run_kf returns m x (T+1), transpose to (T+1) x m
+    zsmooth, _, _, _ = run_kf(y, A, C, Q, R, Z_0, V_0)
+    Zsmooth = zsmooth.T  # m x (T+1) -> (T+1) x m
+    
+    # Get smoothed X (standardized)
+    # MATLAB: x_sm = Zsmooth(2:end,:) * C';
+    # Zsmooth is (T+1) x m, C is N x m, C' is m x N
+    # Zsmooth(2:end,:) selects rows 2 to end (skip initial state), gives T x m
+    # Then Zsmooth(2:end,:) * C' gives T x m * m x N = T x N
+    x_sm = Zsmooth[1:, :] @ C.T  # T x N (standardized smoothed data)
+    
+    # Unstandardized smoothed data
+    # MATLAB: X_sm = repmat(Wx,T,1) .* x_sm + repmat(Mx,T,1)
+    # Handle NaN in Wx and Mx (can occur if series had all NaN values)
+    Wx_clean = np.where(np.isnan(Wx), 1.0, Wx)
+    Mx_clean = np.where(np.isnan(Mx), 0.0, Mx)
+    # Element-wise multiplication: (T x N) .* (T x N) + (T x N)
+    # Use broadcasting: x_sm is T x N, Wx_clean is (N,), so x_sm * Wx_clean broadcasts correctly
+    X_sm = x_sm * Wx_clean + Mx_clean  # Broadcasting: T x N * (N,) + (N,) = T x N
+    
+    # Create result structure
+    Res = DFMResult(
+        x_sm=x_sm,
+        X_sm=X_sm,
+        Z=Zsmooth[1:, :],  # T x m (skip initial state)
+        C=C,
+        R=R,
+        A=A,
+        Q=Q,
+        Mx=Mx,
+        Wx=Wx,
+        Z_0=Z_0,
+        V_0=V_0,
+        r=r,
+        p=p
+    )
+    
+    # Display output tables (optional - can be disabled for cleaner output)
+    try:
+        _display_dfm_tables(Res, config, nQ)
+    except Exception:
+        pass  # Skip if display fails
+    
+    return Res
+
+
+def _display_dfm_tables(Res: DFMResult, config, nQ: int) -> None:
+    """Display DFM estimation output tables."""
+    nM = len(config.SeriesID) - nQ
+    nLags = max(Res.p, 5)  # 5 comes from monthly-quarterly aggregation
+    nFactors = int(np.sum(Res.r))
+    
+    try:
+        print('\n\n\n')
+        
+        # Table 4: Factor Loadings for Monthly Series
+        print('Table 4: Factor Loadings for Monthly Series')
+        # Only select lag(0) terms - every 5th column starting from 0
+        C_monthly = Res.C[:nM, ::5][:, :nFactors]
+        try:
+            import pandas as pd
+            df = pd.DataFrame(C_monthly, 
+                            index=[name.replace(' ', '_') for name in config.SeriesName[:nM]],
+                            columns=config.BlockNames[:nFactors] if len(config.BlockNames) >= nFactors else [f'Block{i+1}' for i in range(nFactors)])
+            print(df.to_string())
+        except (ValueError, IndexError, AttributeError) as e:
+            # DataFrame creation or display failed - show shape instead
+            # This can happen if indices/columns don't match or pandas unavailable
+            print(f'Monthly loadings shape: {C_monthly.shape}')
+        print('\n\n\n')
+        
+        # Table 5: Quarterly Loadings Sample (Global Factor)
+        print('Table 5: Quarterly Loadings Sample (Global Factor)')
+        # Select only quarterly series and first 5 columns (lag 0-4)
+        C_quarterly = Res.C[-nQ:, :5]
+        try:
+            df = pd.DataFrame(C_quarterly,
+                            index=[name.replace(' ', '_') for name in config.SeriesName[-nQ:]],
+                            columns=['f1_lag0', 'f1_lag1', 'f1_lag2', 'f1_lag3', 'f1_lag4'])
+            print(df.to_string())
+        except (ValueError, IndexError, AttributeError) as e:
+            # DataFrame creation or display failed - show shape instead
+            print(f'Quarterly loadings shape: {C_quarterly.shape}')
+        print('\n\n\n')
+        
+        # Table 6: Autoregressive Coefficients on Factors
+        print('Table 6: Autoregressive Coefficients on Factors')
+        A_terms = np.diag(Res.A)
+        Q_terms = np.diag(Res.Q)
+        # Only select lag(0) terms - every 5th element
+        A_terms_factors = A_terms[::5][:nFactors]
+        Q_terms_factors = Q_terms[::5][:nFactors]
+        try:
+            df = pd.DataFrame({
+                'AR_Coefficient': A_terms_factors,
+                'Variance_Residual': Q_terms_factors
+            }, index=[name.replace(' ', '_') for name in config.BlockNames[:nFactors]])
+            print(df.to_string())
+        except (ValueError, IndexError, AttributeError) as e:
+            # DataFrame creation or display failed - show values instead
+            print(f'Factor AR coefficients: {A_terms_factors}')
+        print('\n\n\n')
+        
+        # Table 7: Autoregressive Coefficients on Idiosyncratic Component
+        print('Table 7: Autoregressive Coefficients on Idiosyncratic Component')
+        # MATLAB: A_terms([nFactors*5+1:nFactors*5+nM nFactors*5+nM+1:5:end])
+        # Note: MATLAB is 1-indexed, Python is 0-indexed
+        # MATLAB nFactors*5+1 corresponds to Python index nFactors*5
+        rp1 = nFactors * 5  # Start of idiosyncratic component (0-indexed)
+        # Monthly idiosyncratic: indices rp1 to rp1+nM-1 (inclusive)
+        monthly_idx = np.arange(rp1, rp1 + nM)
+        # Quarterly idiosyncratic: every 5th index starting from rp1+nM
+        quarterly_idx = np.arange(rp1 + nM, len(A_terms), 5)
+        combined_idx = np.concatenate([monthly_idx, quarterly_idx])
+        
+        # Ensure indices are within bounds
+        combined_idx = combined_idx[combined_idx < len(A_terms)]
+        
+        A_idio = A_terms[combined_idx]
+        Q_idio = Q_terms[combined_idx]
+        try:
+            # Map indices back to series names
+            # Monthly series: direct mapping (0 to nM-1)
+            # Quarterly series: need to map to quarterly series index
+            series_indices = []
+            for idx in combined_idx:
+                if idx < rp1 + nM:
+                    # Monthly idiosyncratic - map to monthly series
+                    series_idx = idx - rp1
+                    if series_idx < nM:
+                        series_indices.append(series_idx)
+                    else:
+                        series_indices.append(None)
+                else:
+                    # Quarterly idiosyncratic - map to quarterly series
+                    # (idx - (rp1 + nM)) / 5 gives which quarterly series
+                    q_idx = (idx - (rp1 + nM)) // 5
+                    if q_idx < nQ:
+                        series_indices.append(nM + q_idx)
+                    else:
+                        series_indices.append(None)
+            
+            # Filter out None and get valid series names
+            valid_indices = [i for i in series_indices if i is not None and i < len(config.SeriesName)]
+            series_names_list = [config.SeriesName[i].replace(' ', '_') for i in valid_indices[:len(A_idio)]]
+            
+            df = pd.DataFrame({
+                'AR_Coefficient': A_idio[:len(series_names_list)],
+                'Variance_Residual': Q_idio[:len(series_names_list)]
+            }, index=series_names_list)
+            print(df.to_string())
+        except (ValueError, IndexError, AttributeError) as e:
+            # DataFrame creation or display failed - show values instead
+            print(f'Idiosyncratic AR coefficients (first 10): {A_idio[:min(10, len(A_idio))]}')
+            if len(A_idio) > 10:
+                print(f'... (total {len(A_idio)} coefficients)')
+        print('\n\n\n')
+        
+    except Exception as e:
+        print(f'Error displaying tables: {e}')
+        pass
+