TESTS FOR PARAMETER INSTABILITY IN DYNAMIC FACTOR MODELS

Xu Han and Atsushi Inoue

Econometric Theory, 2015, vol. 31, issue 5, 1117-1152

Abstract: In this paper, 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 postbreak 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.

Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (59)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
Working Paper: Tests for Parameter Instability in Dynamic Factor Models (2013)
Working Paper: Tests for Parameter Instability in Dynamic Factor Models (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cup:etheor:v:31:y:2015:i:05:p:1117-1152_00

Access Statistics for this article

More articles in Econometric Theory from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().