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Dynamic Specification Tests for Static Factor Models

Gabriele Fiorentini () and Enrique Sentana ()

Working Papers from CEMFI

Abstract: We derive computationally simple score tests of serial correlation in the levels and squares of common and idiosyncratic factors in static factor models. The implicit orthogonality conditions resemble the orthogonality conditions of models with observed factors but the weighting matrices reflect their unobservability. We derive more powerful tests for elliptically symmetric distributions, which can be either parametrically or semiparametrically specified, and robustify the Gaussian tests against general nonnormality. Our Monte Carlo exercises assess the finite sample reliability and power of our proposed tests, and compare them to other existing procedures. Finally, we apply our methods to monthly US stock returns.

Date: 2009-12
New Economics Papers: this item is included in nep-ecm and nep-ets
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Working Paper: Dynamic Specification Tests for Static Factor Models (2010) Downloads
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