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Generalized Reduced Rank Tests using the Singular Value Decomposition

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Author Info
Kleibergen, F.R.
Paap, R. (Erasmus Econometric Institute)

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Abstract

We propose a novel statistic to test the rank of a matrix. The rank statistic overcomes deficiencies of existing rank statistics, like: necessity of a Kronecker covariance matrix for the canonical correlation rank statistic of Anderson (1951), sensitivity to the ordering of the variables for the LDU rank statistic of Cragg and Donald (1996) and Gill and Lewbel (1992), a limiting distribution that is not a standard chi-squared distribution for the rank statistic of Robin and Smith (2000) and usage of numerical optimization for the objective function statistic of Cragg and Donald (1997). The new rank statistic consists of a quadratic form of a (orthogonal) transformation of the smallest singular values of a unrestricted estimate of the matrix of interest. The quadratic form is taken with respect to the inverse of a unrestricted covariance matrix that can be estimated using a heteroscedasticity autocorrelation consistent estimator. The rank statistic has a standard chi squared limiting distribution. In case of a Kronecker covariance matrix, the rank statistic simplifies to the canonical correlation rank statistic. In the non-stationary cointegration case, the limiting distribution of the rank statistic is identical to that of the Johansen trace statistic. We apply the rank statistic to test for the rank of a matrix that governs the identification of the parameters in the stochastic discount factor model of Jagannathan and Wang (1996). The rank statistic shows that non-identification of the parameters can not be rejected. We further use the stochastic discount factor model to illustrate the validity of the limiting distribution and to conduct a power comparison.

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Paper provided by Erasmus University Rotterdam, Econometric Institute in its series Econometric Institute Report with number EI 2003-01 Revision_Date: 2009-07-29.

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Date of creation: 17 Feb 2003
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Handle: RePEc:dgr:eureir:1765001681

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Related research
Keywords: stochastic discount factor model; cointegration; GMM;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Cragg, John G. & Donald, Stephen G., 1997. "Inferring the rank of a matrix," Journal of Econometrics, Elsevier, vol. 76(1-2), pages 223-250. [Downloadable!] (restricted)
  2. Peter C.B. Phillips & Victor Solo, 1989. "Asymptotics for Linear Processes," Cowles Foundation Discussion Papers 932, Cowles Foundation, Yale University. [Downloadable!]
  3. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
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  4. Andrews, Donald W K, 1991. "Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimation," Econometrica, Econometric Society, vol. 59(3), pages 817-58, May. [Downloadable!] (restricted)
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  5. Jonathan H. Wright, 2000. "Detecting lack of identification in GMM," International Finance Discussion Papers 674, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  6. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  8. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March. [Downloadable!] (restricted)
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  9. Kenneth D. West, 1995. "Another Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," NBER Technical Working Papers 0183, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Lewbel, Arthur, 1991. "The Rank of Demand Systems: Theory and Nonparametric Estimation," Econometrica, Econometric Society, vol. 59(3), pages 711-30, May. [Downloadable!] (restricted)
  11. Robin, J.M. & Smith, R.J., 1995. "Tests of Rank," Cambridge Working Papers in Economics 9521, Faculty of Economics, University of Cambridge.
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    • Robin, Jean-Marc & Smith, Richard J., 2000. "Tests Of Rank," Econometric Theory, Cambridge University Press, vol. 16(02), pages 151-175, April. [Downloadable!]
  12. Jagannathan, Ravi & Skoulakis, Georgios & Wang, Zhenyu, 2002. "Generalized Method of Moments: Applications in Finance," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(4), pages 470-81, October.
  13. Kleibergen, Frank & van Dijk, Herman K., 1994. "Direct cointegration testing in error correction models," Journal of Econometrics, Elsevier, vol. 63(1), pages 61-103, July. [Downloadable!] (restricted)
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  14. Newey, Whitney K. & McFadden, Daniel, 1986. "Large sample estimation and hypothesis testing," Handbook of Econometrics, in: R. F. Engle & D. McFadden (ed.), Handbook of Econometrics, edition 1, volume 4, chapter 36, pages 2111-2245 Elsevier. [Downloadable!] (restricted)
  15. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November. [Downloadable!] (restricted)
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