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Tests for Serial Dependence in Static, Non-Gaussian Factor Models

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We derive simple algebraic expressions for score tests of serial correlation in the levels and squares of common and idiosyncratic factors in static factor models with (semi) parametrically specified elliptical distributions even though one must generally compute the likelihood by simulation. We also robustify our Gaussian tests against nonnormality. The orthogonality conditions resemble the orthogonality conditions of models with observed factors but the weighting matrices reflect their unobservability. 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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Paper provided by CEMFI in its series Working Papers with number wp2012_1211.

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Date of creation: Oct 2012
Handle: RePEc:cmf:wpaper:wp2012_1211
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  23. Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers 95-20, Duke University, Department of Economics.
  24. 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.
  25. Javier Mencía & Enrique Sentana, 2009. "Multivariate location-scale mixtures of normals and mean-variance-skewness portfolio allocation," Working Papers 0909, Banco de España;Working Papers Homepage.
  26. 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.
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  32. 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.
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  35. Giorgio Calzolari & Gabriele Fiorentini & Enrique Sentana, 2004. "Constrained Indirect Estimation," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 945-973.
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