Estimating and Testing High Dimensional Factor Models With Multiple Structural Changes

72 Pages Posted: 2 Mar 2020

See all articles by Badi H. Baltagi

Badi H. Baltagi

Syracuse University; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics; Syracuse University - Maxwell School of Citizenship and Public Affairs

Chihwa Kao

Syracuse University

Fa Wang

Peking University

Date Written: July 26, 2019

Abstract

This paper considers multiple changes in the factor loadings of a high dimensional factor model occurring at dates that are unknown but common to all subjects. Since the factors are unobservable, the problem is converted to estimating and testing structural changes in the second moments of the pseudo factors. We consider both joint and sequential estimation of the change points and show that the distance between the estimated and the true change points is Op(1). We find that the estimation error contained in the estimated pseudo factors has no effect on the asymptotic properties of the estimated change points as the cross-sectional dimension N and the time dimension T go to infinity jointly. No N-T ratio condition is needed. We also propose (i) tests for the null of no change versus the alternative of l changes (ii) tests for the null of l changes versus the alternative of l + 1 changes, and show that using estimated factors asymptotically has no effect on their limit distributions if √T/N→0. These tests allow us to make inference on the presence and number of structural changes. Simulation results show good performance of the proposed procedure. In an application to US quarterly macroeconomic data we detect two possible breaks.

Keywords: factor model, multiple changes, model selection, panel data

JEL Classification: C13; C33

Suggested Citation

Baltagi, Badi H. and Kao, Chihwa D. and Wang, Fa, Estimating and Testing High Dimensional Factor Models With Multiple Structural Changes (July 26, 2019). Available at SSRN: https://ssrn.com/abstract=3531662 or http://dx.doi.org/10.2139/ssrn.3531662

Badi H. Baltagi

Syracuse University ( email )

426 Eggers Hall
Syracuse, NY 13244-1020
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315-443-1630 (Phone)
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HOME PAGE: http://https://pbaltagi.wix.com/badibaltagi

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Germany

IZA Institute of Labor Economics

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Germany

Syracuse University - Maxwell School of Citizenship and Public Affairs ( email )

400 Eggers Hall
Syracuse, NY 13244
United States

Chihwa D. Kao

Syracuse University ( email )

900 S. Crouse Avenue
426 Eggers Hall Maxwell School of Citizenship and Public Affairs
Syracuse, NY 13244
United States
315-443-3233 (Phone)
315-443-1081 (Fax)

Fa Wang (Contact Author)

Peking University ( email )

Beijing
China

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