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Dynamic specification tests for dynamic factor models

Gabriele Fiorentini () and Enrique Sentana ()

No 2018_07, Econometrics Working Papers Archive from Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti"

Abstract: We derive computationally simple expressions for score tests of misspecification in parametric dynamic factor models using frequency domain techniques. We interpret those diagnostics as time domain moment tests which assess whether certain autocovariances of the smoothed latent variables match their theoretical values under the null of correct model specification. We also reinterpret reduced-form residual tests as checking specific restrictions on structural parameters. Our Gaussian tests are robust to nonnormal, independent innovations. Monte Carlo exercises confirm the finite sample reliability and power of our proposals. Finally, we illustrate their empirical usefulness in an application that constructs a US coincident indicator.

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)
Pages: 41 pages
Date: 2019-01
New Economics Papers: this item is included in nep-ore
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Related works:
Journal Article: Dynamic specification tests for dynamic factor models (2019) Downloads
Working Paper: Dynamic Specification Tests for Dynamic Factor Models (2013) Downloads
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