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Asymptotic Inference for Common Factor Models in the Presence of Jumps

Listed author(s):
  • YAMAMOTO, Yohei

Financial and macroeconomic time-series data often exhibit infrequent but large jumps. Such jumps may be considered as outliers that are independent of the underlying data-generating processes and contaminate inferences on their model. In this study, we investigate the effects of such jumps on asymptotic inference for large-dimensional common factor models. We first derive the upper bound of jump magnitudes with which the standard asymptotic inference goes through. Second, we propose a jump-correction method based on a series-by-series outlier detection algorithm without accounting for the factor structure. This method gains standard asymptotic normality for the factor model unless outliers occur at common dates. Finally, we propose a test to investigate whether the jumps at a common date are independent outliers or are of factors. A Monte Carlo experiment confirms that the proposed jump-correction method retrieves good finite sample properties. The proposed test shows good size and power. Two small empirical applications illustrate usefulness of the proposed methods.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/27912/1/070_hiasDP-E-4.pdf
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Paper provided by Hitotsubashi Institute for Advanced Study, Hitotsubashi University in its series Discussion paper series with number HIAS-E-4.

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Length: 56 p.
Date of creation: 17 May 2016
Handle: RePEc:hit:hiasdp:hias-e-4
Note: July 2, 2015; Reviced May 17, 2016
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