Publication Type
Journal Article
Version
submittedVersion
Publication Date
12-2020
Abstract
We propose a model-free test for structural changes in factor models. The basic idea is to regress the data on commonly estimated factors by local smoothing and compare the fitted values of time-varying factor loadings with those of time-invariant factor loadings estimated via principal component analysis. By construction, the test is designed to be powerful against both smooth structural changes and sudden structural breaks with a possibly unknown number of breaks and unknown break dates in the factor loadings. No restrictions on the form of alternatives or trimming of boundary regions near the beginning or end of the sample period is required for the test. The test has power to detect the usual nonparametric rate of local alternatives. Monte Carlo studies demonstrate excellent power of the test in detecting both smooth and sudden structural changes in the factor loadings. In an application using U.S. asset returns, we find significant evidence against time-invariant factor loadings.
Keywords
Factor model, Test, Local smoothing, Structural change, Local power
Discipline
Econometrics
Research Areas
Econometrics
Publication
Econometric Theory
Volume
36
Issue
6
First Page
1127
Last Page
1158
ISSN
0266-4666
Identifier
10.1017/S0266466619000446
Publisher
Cambridge University Press
Embargo Period
4-18-2021
Citation
SU, Liangjun and WANG, Xia.
Testing for structural changes in factor models via a nonparametric regression. (2020). Econometric Theory. 36, (6), 1127-1158.
Available at: https://ink.library.smu.edu.sg/soe_research/2465
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1017/S0266466619000446