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Dynamic Specification Tests for Dynamic Factor Models

Gabriele Fiorentini () and Enrique Sentana ()

Working Papers from CEMFI

Abstract: We derive computationally simple and intuitive expressions for score tests of neglected serial correlation in common and idiosyncratic factors in dynamic factor models using frequency domain techniques. The implied time domain orthogonality conditions are analogous to the conditions obtained by treating the smoothed estimators of the innovations in the latent factors as if they were observed, but they account for their final estimation errors. Monte Carlo exercises confirm the finite sample reliability and power of our proposed tests. Finally, we illustrate their empirical usefulness in an application that constructs a monthly coincident indicator for the US from four macro series.

Keywords: Kalman filter; LM tests; Spectral maximum likelihood; Wiener-Kolmogorov filter. (search for similar items in EconPapers)
JEL-codes: C32 C38 C52 C12 C13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2013-06
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Journal Article: Dynamic specification tests for dynamic factor models (2019) Downloads
Working Paper: Dynamic specification tests for dynamic factor models (2019) Downloads
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