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Identification, estimation and testing of conditionally heteroskedastic factor models

  • Sentana, Enrique
  • Fiorentini, Gabriele

We investigate several important inference issues for factor models with dynamic heteroskedasticity in the common factors. First, we show that such models are identified if we take into account the time-variation in the variances of the factors. Our results also apply to dynamic versions of the APT, dynamic factor models, and vector autoregressions. Secondly, we propose a consistent two-step estimation procedure which does not rely on knowledge of any factor estimates, and explain how to compute correct standard errors.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 102 (2001)
Issue (Month): 2 (June)
Pages: 143-164

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Handle: RePEc:eee:econom:v:102:y:2001:i:2:p:143-164
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  1. Nijman, T.E. & Sentana, E., 1996. "Marginalization and contemporaneous aggregation in multivariate GARCH processes," Other publications TiSEM 1faf40e0-ce91-45fd-a98d-4, Tilburg University, School of Economics and Management.
  2. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
  4. Demos, Antonis & Sentana, Enrique, 1998. "An EM Algorithm for Conditionally Heteroscedastic Factor Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(3), pages 357-61, July.
  5. Robert Jennrich, 1978. "Rotational equivalence of factor loading matrices with specified values," Psychometrika, Springer, vol. 43(3), pages 421-426, September.
  6. 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.
  7. Lin, Wen-Ling, 1992. "Alternative Estimators for Factor GARCH Models--A Monte Carlo Comparison," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(3), pages 259-79, July-Sept.
  8. King, Mervyn & Sentana, Enrique & Wadhwani, Sushil, 1994. "Volatility and Links between National Stock Markets," Econometrica, Econometric Society, vol. 62(4), pages 901-33, July.
  9. Harvey, Andrew & Ruiz, Esther & Sentana, Enrique, 1992. "Unobserved component time series models with Arch disturbances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 129-157.
  10. Durbin, J, 1970. "Testing for Serial Correlation in Least-Squares Regression When Some of the Regressors are Lagged Dependent Variables," Econometrica, Econometric Society, vol. 38(3), pages 410-21, May.
  11. 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.
  12. Demos, Antonis & Sentana, Enrique, 1998. "Testing for GARCH effects: a one-sided approach," Journal of Econometrics, Elsevier, vol. 86(1), pages 97-127, June.
  13. Giraitis, Liudas & Kokoszka, Piotr & Leipus, Remigijus, 2000. "Stationary Arch Models: Dependence Structure And Central Limit Theorem," Econometric Theory, Cambridge University Press, vol. 16(01), pages 3-22, February.
  14. 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.
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