Dynamic specification tests for dynamic factor models

Gabriele Fiorentini · Enrique Sentana

32 citations0/0 files storedJournal of Applied Econometrics

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Monetary Policy and Economic Impact Statistical Methods and Applications Statistical and numerical algorithms

Abstract

Summary We derive computationally simple expressions for score tests of misspecification in parametric dynamic factor models using frequency domain techniques. We interpret those diagnostics as time domain moment tests which assess whether certain autocovariances of the smoothed latent variables match their theoretical values under the null of correct model specification. We also reinterpret reduced‐form residual tests as checking specific restrictions on structural parameters. Our Gaussian tests are robust to nonnormal, independent innovations. Monte Carlo exercises confirm the finite‐sample reliability and power of our proposals. Finally, we illustrate their empirical usefulness in an application that constructs a US coincident indicator.

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References

1989New Indexes of Coincident and Leading Economic Indicators 2000The Generalized Dynamic-Factor Model: Identification and Estimation 1978Testing Against General Autoregressive and Moving Average Error Models when the Regressors Include Lagged Dependent Variables 1970Testing for Serial Correlation in Least-Squares Regression When Some of the Regressors are Lagged Dependent Variables 1983Arbitrage, Factor Structure, and Mean-Variance Analysis on Large Asset Markets 2005The macroeconomy and the yield curve: a dynamic latent factor approach 2009Real-Time Measurement of Business Conditions 1977Business Cycle Modeling Without Pretending to Have Too Much A Priori Economic Theory

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2015Tests for serial dependence in static, non-Gaussian factor models 2021Factor extraction using Kalman filter and smoothing: This is not just another survey 2013Fiscal policy and external adjustment: New evidence

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