Arbeitspapier
Testing for structural breaks in dynamic factor models
From time to time, economies undergo far-reaching structural changes. 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 test procedures for structural breaks. It is shown that structural breaks severely inflate the number of factors identified by the usual information criteria. Based on the strict factor model the hypothesis of a structural break is tested by using Likelihood-Ratio, Lagrange-Multiplier and Wald statistics. The LM test which is shown to perform best in our Monte Carlo simulations, is generalized to factor models where the common factors and idiosyncratic components are serially correlated. We also apply the suggested test procedure to a US dataset used in Stock and Watson (2005) and a euro-area dataset described in Altissimo et al. (2007). We find evidence that the beginning of the so-called Great Moderation in the US as well as the Maastricht treaty and the handover of monetary policy from the European national central banks to the ECB coincide with structural breaks in the factor loadings. Ignoring these breaks may yield misleading results if the empirical analysis focuses on the interpretation of common factors or on the transmission of common shocks to the variables of interest.
- Language
-
Englisch
- Bibliographic citation
-
Series: Discussion Paper Series 1 ; No. 2009,05
- Classification
-
Wirtschaft
Hypothesis Testing: General
Econometrics
- Subject
-
Dynamic factor models
structural breaks
number of factors
Great Moderation
EMU
Faktorenanalyse
Hauptkomponentenanalyse
Strukturbruch
Statistischer Test
Theorie
Schätzung
USA
EU-Staaten
- Event
-
Geistige Schöpfung
- (who)
-
Breitung, Jörg
Eickmeier, Sandra
- Event
-
Veröffentlichung
- (who)
-
Deutsche Bundesbank
- (where)
-
Frankfurt a. M.
- (when)
-
2009
- Handle
- Last update
-
10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Breitung, Jörg
- Eickmeier, Sandra
- Deutsche Bundesbank
Time of origin
- 2009
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