Journal
JOURNAL OF ECONOMETRICS
Volume 189, Issue 1, Pages 187-206Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jeconom.2015.06.018
Keywords
Factor model; Principal components; Common breaks; Spurious factors; Nonmonotonic power
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Funding
- MEXT [25870235, 25285067]
- JSPS Fellows [259598]
- Grants-in-Aid for Scientific Research [25870235, 25285067, 25245042] Funding Source: KAKEN
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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. (C) 2015 Elsevier B.V. All rights reserved.
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