Affordable Access

Publisher Website

Testing for structural breaks in dynamic factor models

Authors
Journal
Journal of Econometrics
0304-4076
Publisher
Elsevier
Publication Date
Volume
163
Issue
1
Identifiers
DOI: 10.1016/j.jeconom.2010.11.008
Keywords
  • Structural Break
  • Factor Model
  • Lm Test

Abstract

Abstract In this paper we investigate the consequences of structural breaks in the factor loadings for the specification and estimation of factor models based on principal components and suggest procedures for testing for structural breaks. It is shown that structural breaks severely inflate the number of factors identified by the usual information criteria. The hypothesis of a structural break is tested by using LR, LM and Wald statistics. The LM test (which performs best in our Monte Carlo simulations) is generalized to test for structural breaks in factor models where the break date is unknown and the common factors and idiosyncratic components are serially correlated. The proposed test procedures are applied to datasets from the US and the euro area.

There are no comments yet on this publication. Be the first to share your thoughts.