Journal
JOURNAL OF ECONOMETRICS
Volume 207, Issue 1, Pages 1-29Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jeconom.2018.06.019
Keywords
Break point; Factor model; Fused Lasso; Group Lasso; Information criterion; Principal component; Structural change; Super-consistency; Time-varying parameter
Categories
Funding
- NSF [DMS 1306972, DMS 1712558]
- Hellman Fellowship
- Singapore Ministry of Education [MOE2012-T2-2-021]
- Lee Kong Chian Fund for Excellence
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In this paper we study the estimation of a large dimensional factor model when the factor loadings exhibit an unknown number of changes over time. We propose a novel three-step procedure to detect the breaks if any and then identify their locations. In the first step, we divide the whole time span into subintervals and fit a conventional factor model on each interval. In the second step, we apply the adaptive fused group Lasso to identify intervals containing a break. In the third step, we devise a grid search method to estimate the location of the break on each identified interval. We show that with probability approaching one our method can identify the correct number of changes and estimate the break locations. Simulation studies indicate superb finite sample performance of our method. We apply our method to investigate Stock and Watson's (2009) U.S. monthly macroeconomic dataset and identify five breaks in the factor loadings, spanning 1959-2006. (C) 2018 Elsevier B.V. All rights reserved.
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