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Identification, Estimation and Testing of Conditionally Heteroskedastic Factor Model

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  • Sentana, E.
  • Fiorentini, G.

Abstract

We investigate several important inference issues for factor models with dynamic heteroskedasticity in the common factors. First, we show that such models are identified if we take into account the time-variation in the variances of the factors. Our results also apply to dynamic versions of the APT, dynamic factor models, and vector autoregressions. Secondly, we propose a consistent two-step estimation procedure which does not rely on knowledge of any factor estimates, and explain how to compute correct standard errors.

Suggested Citation

  • Sentana, E. & Fiorentini, G., 1997. "Identification, Estimation and Testing of Conditionally Heteroskedastic Factor Model," Papers 9709, Centro de Estudios Monetarios Y Financieros-.
    • Handle: RePEc:fth:cemfdt:9709
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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
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    5. Lin, Wen-Ling, 1992. "Alternative Estimators for Factor GARCH Models--A Monte Carlo Comparison," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(3), pages 259-279, July-Sept.
    6. Enrique Sentana, 1998. "The relation between conditionally heteroskedastic factor models and factor GARCH models," Econometrics Journal, Royal Economic Society, vol. 1(RegularPa), pages 1-9.
    7. Wegge, Leon L., 1996. "Local identifiability of the factor analysis and measurement error model parameter," Journal of Econometrics, Elsevier, vol. 70(2), pages 351-382, February.
    8. 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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    11. Engle, Robert F. & Ng, Victor K. & Rothschild, Michael, 1990. "Asset pricing with a factor-arch covariance structure : Empirical estimates for treasury bills," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 213-237.
    12. Durbin, J, 1970. "Testing for Serial Correlation in Least-Squares Regression When Some of the Regressors are Lagged Dependent Variables," Econometrica, Econometric Society, vol. 38(3), pages 410-421, May.
    13. Davidson, Russell & MacKinnon, James G, 1998. "Graphical Methods for Investigating the Size and Power of Hypothesis Tests," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(1), pages 1-26, January.
    14. James Dunn, 1973. "A note on a sufficiency condition for uniqueness of a restricted factor matrix," Psychometrika, Springer;The Psychometric Society, vol. 38(1), pages 141-143, March.
    15. Enrique Sentana, 2000. "The Likelihood Function of Conditionally Heteroskedastic Factor Models," Annals of Economics and Statistics, GENES, issue 58, pages 1-19.
    16. Robert Jennrich, 1978. "Rotational equivalence of factor loading matrices with specified values," Psychometrika, Springer;The Psychometric Society, vol. 43(3), pages 421-426, September.
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    More about this item

    Keywords

    HETEROSKEDASTICITY ; MODELS ; TESTS;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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