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Testing for factor loading structural change under common breaks

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  • Yamamoto, Yohei
  • Tanaka, Shinya

Abstract

This paper proposes a new test for factor loading structural change in dynamic factor models. We first show that the leading test proposed by Breitung and Eickmeier (2011) exhibits nonmonotonic power, essentially because the breaks are considered as spurious factors with stable factor loadings. The proposed test eliminates the effects of the spurious factors by maximizing the test statistic over possible numbers of the original factors. Monte Carlo simulations and an empirical example using U.S. Treasury yield curve data clearly illustrate the usefulness of the proposed test.

Suggested Citation

  • Yamamoto, Yohei & Tanaka, Shinya, 2015. "Testing for factor loading structural change under common breaks," Journal of Econometrics, Elsevier, vol. 189(1), pages 187-206.
    • Handle: RePEc:eee:econom:v:189:y:2015:i:1:p:187-206
    DOI: 10.1016/j.jeconom.2015.06.018
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    More about this item

    Keywords

    Factor model; Principal components; Common breaks; Spurious factors; Nonmonotonic power;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis

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