Tests for Parameter Instability in Dynamic Factor Models

Xu Han and Atsushi Inoue

No 306, TERG Discussion Papers from Graduate School of Economics and Management, Tohoku University

Abstract: We develop tests for structural breaks of factor loadings in dynamic factor models. We focus on the joint null hypothesis that all factor loadings are constant over time. Because the number of factor loading parameters goes to infinity as the sample size grows, conventional tests cannot be used. Based on the fact that the presence of a structural change in factor loadings yields a structural change in second moments of factors obtained from the full sample principal component estimation, we reduce the infinite-dimensional problem into a finite-dimensional one and our statistic compares the pre- and post-break subsample second moments of estimated factors. Our test is consistent under the alternative hypothesis in which a fraction of or all factor loadings have structural changes. The Monte Carlo results show that our test has good finite-sample size and power.

Pages: 63 pages
Date: 2011-01, Revised 2013-05
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Citations: View citations in EconPapers (6)

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http://hdl.handle.net/10097/56547

Related works:
Journal Article: TESTS FOR PARAMETER INSTABILITY IN DYNAMIC FACTOR MODELS (2015)
Working Paper: Tests for Parameter Instability in Dynamic Factor Models (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:toh:tergaa:306

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