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Testing for structural breaks in dynamic factor models

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  • Breitung, Jörg
  • Eickmeier, Sandra

Abstract

In this paper we investigate the consequences of structural breaks in the factor loadings for the specification and estimation of factor models based on principal components and suggest procedures for testing for structural breaks. It is shown that structural breaks severely inflate the number of factors identified by the usual information criteria. The hypothesis of a structural break is tested by using LR, LM and Wald statistics. The LM test (which performs best in our Monte Carlo simulations) is generalized to test for structural breaks in factor models where the break date is unknown and the common factors and idiosyncratic components are serially correlated. The proposed test procedures are applied to datasets from the US and the euro area.

Suggested Citation

  • Breitung, Jörg & Eickmeier, Sandra, 2011. "Testing for structural breaks in dynamic factor models," Journal of Econometrics, Elsevier, vol. 163(1), pages 71-84, July.
    • Handle: RePEc:eee:econom:v:163:y:2011:i:1:p:71-84
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    More about this item

    Keywords

    Structural break Factor model LM test;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

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