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Detecting big structural breaks in large factor models

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  • Chen, Liang
  • Dolado, Juan Jose
  • Gonzalo, Jesus

Abstract

Constant factor loadings is a standard assumption in the analysis of large dimensional factor models. Yet, this assumption may be restrictive unless parameter shifts are mild. In this paper we develop a new testing procedure to detect big breaks in factor loadings at either known or unknown dates. It is based upon testing for structural breaks in a regression of the first of the ¯r factors estimated by PC for the whole sample on the remaining r−1 factors, where r is chosen using Bai and Ng´s (2002) information criteria. We argue that this test is more powerful than other tests available in the literature on this issue.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 31344.

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Date of creation: 08 Jun 2011
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Handle: RePEc:pra:mprapa:31344

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Keywords: structural break; large factor model;

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Citations

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Cited by:
  1. Xu Han & Atsushi Inoue, 2011. "Tests for Parameter Instability in Dynamic Factor Models," TERG Discussion Papers, Graduate School of Economics and Management, Tohoku University 306, Graduate School of Economics and Management, Tohoku University, revised May 2013.
  2. YAMAMOTO, Yohei & TANAKA, Shinya, 2013. "Testing for Factor Loading Structural Change under Common Breaks," Discussion Papers 2013-17, Graduate School of Economics, Hitotsubashi University.
  3. Chen, Liang, 2012. "Identifying observed factors in approximate factor models: estimation and hypothesis testing," MPRA Paper 37514, University Library of Munich, Germany.
  4. Cheng, Xu & Liao, Zhipeng & Schorfheide, Frank, 2013. "Shrinkage estimation of high-dimensional factor models with structural instabilities," Working Papers 14-4, Federal Reserve Bank of Philadelphia.
  5. Lorenzo Trapani, 2014. "Comments on: Extensions of some classical methods in change point analysis," TEST: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer, vol. 23(2), pages 283-286, June.
  6. Xu Cheng & Zhipeng Liao & Frank Schorfheide, 2014. "Shrinkage Estimation of High-Dimensional Factor Models with Structural Instabilities," NBER Working Papers 19792, National Bureau of Economic Research, Inc.
  7. Chihwa Kao & Lorenzo Trapani & Giovanni Urga, 2012. "Testing for Breaks in Cointegrated Panels," Center for Policy Research Working Papers, Center for Policy Research, Maxwell School, Syracuse University 135, Center for Policy Research, Maxwell School, Syracuse University.
  8. Valentina Corradi & Norman Swanson, 2013. "Testing for Structural Stability of Factor Augmented Forecasting Models," Departmental Working Papers, Rutgers University, Department of Economics 201314, Rutgers University, Department of Economics.

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