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Testing For Structural Changes In Factor Models Via A Nonparametric Regression

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  • Su, Liangjun
  • Wang, Xia

Abstract

We propose a model-free test for structural changes in factor models. The basic idea is to regress the data on commonly estimated factors by local smoothing and compare the fitted values of time-varying factor loadings with those of time-invariant factor loadings estimated via principal component analysis. By construction, the test is designed to be powerful against both smooth structural changes and sudden structural breaks with a possibly unknown number of breaks and unknown break dates in the factor loadings. No restrictions on the form of alternatives or trimming of boundary regions near the beginning or end of the sample period is required for the test. The test has power to detect the usual nonparametric rate of local alternatives. Monte Carlo studies demonstrate excellent power of the test in detecting both smooth and sudden structural changes in the factor loadings. In an application using U.S. asset returns, we find significant evidence against time-invariant factor loadings.

Suggested Citation

  • Su, Liangjun & Wang, Xia, 2020. "Testing For Structural Changes In Factor Models Via A Nonparametric Regression," Econometric Theory, Cambridge University Press, vol. 36(6), pages 1127-1158, December.
    • Handle: RePEc:cup:etheor:v:36:y:2020:i:6:p:1127-1158_5
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    Cited by:

    1. Chen, Qitong & Hong, Yongmiao & Li, Haiqi, 2024. "Time-varying forecast combination for factor-augmented regressions with smooth structural changes," Journal of Econometrics, Elsevier, vol. 240(1).
    2. Bai, Jushan & Duan, Jiangtao & Han, Xu, 2024. "The likelihood ratio test for structural changes in factor models," Journal of Econometrics, Elsevier, vol. 238(2).
    3. Fu, Zhonghao & Hong, Yongmiao & Wang, Xia, 2023. "Testing for structural changes in large dimensional factor models via discrete Fourier transform," Journal of Econometrics, Elsevier, vol. 233(1), pages 302-331.
    4. Yang, Qing & Zhang, Yi, 2022. "Change-point detection for the link function in a single-index model," Statistics & Probability Letters, Elsevier, vol. 186(C).
    5. Wang, Yiren & Phillips, Peter C.B. & Su, Liangjun, 2024. "Panel data models with time-varying latent group structures," Journal of Econometrics, Elsevier, vol. 240(1).
    6. Wei, Jie & Zhang, Yonghui, 2020. "A time-varying diffusion index forecasting model," Economics Letters, Elsevier, vol. 193(C).

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