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Dynamic Specification Tests for Static Factor Models

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  • Gabriele Fiorentini

    ()
    ( RCEA and Università di Firenze, Italy)

  • Enrique Sentana

    ()
    ( CEMFI, Madrid, Spain)

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 refl ect their unobservability. We derive more powerful tests for elliptically symmetric distributions, which can be either parametrically or semipametrically 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.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 04_10.

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Date of creation: Jan 2010
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Handle: RePEc:rim:rimwps:04_10

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Keywords: ARCH; Financial returns; Kalman filter; LM tests; Predictability;

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References

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Cited by:
  1. Hafedh Bouakez & Foued Chihi & Michel Normandin, 2011. "Fiscal Policy and External Adjustment: New Evidence," Cahiers de recherche 1123, CIRPEE.
  2. Hafedh Bouakez & Badye Omar Essid & Michel Normandin, 2010. "Stock Returns and Monetary Policy: Are There Any Ties ?," Cahiers de recherche 1026, CIRPEE.

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