Testing for factor loading structural change under common breaks

Yohei Yamamoto and Shinya Tanaka

Journal of Econometrics, 2015, vol. 189, issue 1, 187-206

Abstract: This paper proposes a new test for factor loading structural change in dynamic factor models. We first show that the leading test proposed by Breitung and Eickmeier (2011) exhibits nonmonotonic power, essentially because the breaks are considered as spurious factors with stable factor loadings. The proposed test eliminates the effects of the spurious factors by maximizing the test statistic over possible numbers of the original factors. Monte Carlo simulations and an empirical example using U.S. Treasury yield curve data clearly illustrate the usefulness of the proposed test.

Keywords: Factor model; Principal components; Common breaks; Spurious factors; Nonmonotonic power (search for similar items in EconPapers)
JEL-codes: C12 C38 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (36)

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Working Paper: Testing for Factor Loading Structural Change under Common Breaks (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:189:y:2015:i:1:p:187-206

DOI: 10.1016/j.jeconom.2015.06.018

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