Advanced Search
MyIDEAS: Login

Dynamic Specification Tests for Static Factor Models

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.rcfea.org/RePEc/pdf/wp04_10.pdf
Download Restriction: no

Bibliographic Info

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

as in new window
Length:
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:rim:rimwps:04_10

Contact details of provider:
Postal: Via Patara, 3, 47921 Rimini (RN)
Phone: +390541434142
Fax: +39054155431
Email:
Web page: http://www.rcfea.org
More information through EDIRC

Related research

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

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Demos, Antonis & Sentana, Enrique, 1998. "Testing for GARCH effects: a one-sided approach," Journal of Econometrics, Elsevier, vol. 86(1), pages 97-127, June.
  2. Godfrey,L. G., 1991. "Misspecification Tests in Econometrics," Cambridge Books, Cambridge University Press, number 9780521424592, December.
  3. Enrique Sentana & Javier Mencía, 2008. "Multivariate Location-Scale Mixtures Of Normals And Mean-Variance-Skwness Portfolio Allocation," Working Papers wp2008_0805, CEMFI.
  4. Mardi Dungey & Vance L Martin & Adrian R Pagan, 2000. "A multivariate latent factor decomposition of international bond yield spreads," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(6), pages 697-715.
  5. Gabriele Fiorentini & Enrique Sentana Iváñez, 1997. "Identification, estimation and testing of conditionally heteroskedastic factor models," Working Papers. Serie AD 1997-22, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. Narasimhan Jegadeesh & George G. Pennacchi, 1996. "The behavior of interest rates implied by the term structure of Eurodollar future," Proceedings, Federal Reserve Bank of Cleveland, issue Aug, pages 426-451.
  7. Neil Shephard & Gabriele Fiorentini & Enrique Sentana, 2003. "Likelihood-based estimation of latent generalised ARCH structures," FMG Discussion Papers dp453, Financial Markets Group.
  8. Newey, Whitney K, 1985. "Maximum Likelihood Specification Testing and Conditional Moment Tests," Econometrica, Econometric Society, vol. 53(5), pages 1047-70, September.
  9. Enrique Sentana & Javier Mencía, 2008. "Distributional Tests In Multivariate Dynamic Models With Normal And Student T Innovations," Working Papers wp2008_0804, CEMFI.
  10. Hong, Yongmiao, 1996. "Consistent Testing for Serial Correlation of Unknown Form," Econometrica, Econometric Society, vol. 64(4), pages 837-64, July.
  11. Donald Rubin & Dorothy Thayer, 1982. "EM algorithms for ML factor analysis," Psychometrika, Springer, vol. 47(1), pages 69-76, March.
  12. Bai, Jushan & Ng, Serena, 2008. "Large Dimensional Factor Analysis," Foundations and Trends(R) in Econometrics, now publishers, vol. 3(2), pages 89-163, June.
  13. Hafner, Christian M. & Rombouts, Jeroen V.K., 2007. "Semiparametric Multivariate Volatility Models," Econometric Theory, Cambridge University Press, vol. 23(02), pages 251-280, April.
  14. Koenker, Roger, 1981. "A note on studentizing a test for heteroscedasticity," Journal of Econometrics, Elsevier, vol. 17(1), pages 107-112, September.
  15. Gabriele Fiorentini & Giorgio Calzolari & Enrique Sentana, 2007. "Indirect estimation of large conditionally heteroskedastic factor models, with an application to the Dow 30 stocks," Working Paper Series 40-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
  16. Donald W.K. Andrews, 1999. "Testing When a Parameter Is on the Boundary of the Maintained Hypothesis," Cowles Foundation Discussion Papers 1229, Cowles Foundation for Research in Economics, Yale University.
  17. Ross, Stephen A., 1978. "Mutual fund separation in financial theory--The separating distributions," Journal of Economic Theory, Elsevier, vol. 17(2), pages 254-286, April.
  18. Giorgio Calzolari & Gabriele Fiorentini & Enrique Sentana, 2004. "Constrained Indirect Estimation," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 945-973.
  19. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  20. John H. Cochrane, 1992. "Volatility Tests and Efficient Markets: A Review Essay," NBER Working Papers 3591, National Bureau of Economic Research, Inc.
  21. Francis X. Diebold & Marc Nerlove, 1986. "The dynamics of exchange rate volatility: a multivariate latent factor ARCH model," Special Studies Papers 205, Board of Governors of the Federal Reserve System (U.S.).
  22. Hong, Yongmiao & Shehadeh, Ramsey D, 1999. "A New Test for ARCH Effects and Its Finite-Sample Performance," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 91-108, January.
  23. Lehmann, Bruce N. & Modest, David M., 1988. "The empirical foundations of the arbitrage pricing theory," Journal of Financial Economics, Elsevier, vol. 21(2), pages 213-254, September.
  24. James Dunn, 1973. "A note on a sufficiency condition for uniqueness of a restricted factor matrix," Psychometrika, Springer, vol. 38(1), pages 141-143, March.
  25. Sentana, E., 1994. "The Likelihood Function of a Conditionally Heteroskdastic Factor Model with Heywood Cases," Papers 9420, Centro de Estudios Monetarios Y Financieros-.
  26. Bekker, Paul A., 1989. "Identification in restricted factor models and the evaluation of rank conditions," Journal of Econometrics, Elsevier, vol. 41(1), pages 5-16, May.
  27. Connor, Gregory, 1984. "A unified beta pricing theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 13-31, October.
  28. Gabriele Fiorentini & Enrique Sentana, 2007. "On the efficiency and consistency of likelihood estimation in multivariate conditionally heteroskedastic dynamic regression models," Working Paper Series 38-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
  29. Hodgson, Douglas J & Vorkink, Keith P, 2003. "Efficient Estimation of Conditional Asset-Pricing Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(2), pages 269-83, April.
  30. Nijman, T.E. & Sentana, E., 1993. "Marginalization and contemporaneous aggregation in multivariate GARCH processes," Discussion Paper 1993-12, Tilburg University, Center for Economic Research.
  31. Fiorentini, Gabriele & Sentana, Enrique & Calzolari, Giorgio, 2003. "Maximum Likelihood Estimation and Inference in Multivariate Conditionally Heteroscedastic Dynamic Regression Models with Student t Innovations," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(4), pages 532-46, October.
  32. Tauchen, George, 1985. "Diagnostic testing and evaluation of maximum likelihood models," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 415-443.
  33. Guilkey, David K., 1974. "Alternative tests for a first-order vector autoregressive error specification," Journal of Econometrics, Elsevier, vol. 2(1), pages 95-104, May.
  34. Sentana, Enrique, 2004. "Factor representing portfolios in large asset markets," Journal of Econometrics, Elsevier, vol. 119(2), pages 257-289, April.
  35. Mervyn King & Enrique Sentana & Sushil Wadhwani, 1990. "Volatiltiy and Links Between National Stock Markets," NBER Working Papers 3357, National Bureau of Economic Research, Inc.
  36. Amengual, Dante & Sentana, Enrique, 2010. "A comparison of mean-variance efficiency tests," Journal of Econometrics, Elsevier, vol. 154(1), pages 16-34, January.
  37. Hendry, D F, 1971. "Maximum Likelihood Estimation of Systems of Simultaneous Regression Equations with Errors Generated by a Vector Autoregressive Process," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(2), pages 257-72, June.
  38. Robert B. Davies, 2002. "Hypothesis testing when a nuisance parameter is present only under the alternative: Linear model case," Biometrika, Biometrika Trust, vol. 89(2), pages 484-489, June.
  39. Wegge, Leon L., 1996. "Local identifiability of the factor analysis and measurement error model parameter," Journal of Econometrics, Elsevier, vol. 70(2), pages 351-382, February.
  40. Jean-Marie Dufour & Lynda Khalaf & Marie-Claude Beaulieu, 2010. "Multivariate residual-based finite-sample tests for serial dependence and ARCH effects with applications to asset pricing models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(2), pages 263-285.
  41. Sentana, E. & Shah, M., 1994. "An Index of Co-Movements in Financial Time Series," Papers 9415, Centro de Estudios Monetarios Y Financieros-.
  42. Russell Davidson & James G. MacKinnon, 1994. "Graphical Methods for Investigating the Size and Power of Hypothesis Tests," Working Papers 903, Queen's University, Department of Economics.
  43. Breusch, T.S. & Pagan, A.R., . "The Lagrange multiplier test and its applications to model specification in econometrics," CORE Discussion Papers RP -412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  44. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  45. Engle, Robert F., 1984. "Wald, likelihood ratio, and Lagrange multiplier tests in econometrics," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 13, pages 775-826 Elsevier.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Bouakez, Hafedh & Essid, Badye & Normandin, Michel, 2013. "Stock returns and monetary policy: Are there any ties?," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 33-50.
  2. Hafedh Bouakez & Foued Chihi & Michel Normandin, 2011. "Fiscal Policy and External Adjustment: New Evidence," Cahiers de recherche 1123, CIRPEE.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:rim:rimwps:04_10. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roberto Patuelli).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.