Munich Personal RePEc Archive

Estimating and testing high dimensional factor models with multiple structural changes

Baltagi, Badi H. and Kao, Chihwa and Wang, Fa (2016): Estimating and testing high dimensional factor models with multiple structural changes.

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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.

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