Dynamic Specification Tests for Static Factor Models

Gabriele Fiorentini and Enrique Sentana

Working Paper series from Rimini Centre for Economic Analysis

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 non-normality. 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.

Keywords: ARCH; Financial returns; Kalman filter; LM tests; Predictability (search for similar items in EconPapers)
JEL-codes: C12 C13 C14 C16 C32 (search for similar items in EconPapers)
Date: 2010-01
New Economics Papers: this item is included in nep-ecm and nep-ets
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http://www.rcea.org/RePEc/pdf/wp04_10.pdf

Related works:
Working Paper: Dynamic Specification Tests for Static Factor Models (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:04_10

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