Testing for time-varying loadings in dynamic factor models

Jeroen V.K. Rombouts and Jakob Guldbæk Mikkelsen ()
Additional contact information
Jakob Guldbæk Mikkelsen: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: In this paper we develop a test for time-varying factor loadings in factor models. The test is simple to compute and is constructed from estimated factors and residuals using the principal components estimator. The hypothesis is tested by regressing the squared residuals on the squared factors. The squared correlation coefficient times the sample size has a limiting chi-squared distribution. The test can be made robust to serial correlation in the idiosyncratic errors. We find evidence for factor loadings variance in over half of the variables in a dataset for the US economy, while there is evidence of time-varying loadings on the risk factors underlying portfolio returns for around 80% of the portfolios.

Keywords: Factor models; principal components; LM test (search for similar items in EconPapers)
JEL-codes: C12 C33 (search for similar items in EconPapers)
Pages: 46
Date: 2017-06-14
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/17/rp17_22.pdf (application/pdf)

Related works:
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:aah:create:2017-22

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().