Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-24T19:37:41.775Z Has data issue: false hasContentIssue false
  • English
  • Français

LOCALLY STATIONARY FACTOR MODELS: IDENTIFICATION AND NONPARAMETRIC ESTIMATION

Published online by Cambridge University Press:  07 June 2011

Giovanni Motta ,
Christian M. Hafner  and
Rainer von Sachs
Giovanni Motta*
Affiliation:
Maastricht University
Christian M. Hafner
Affiliation:
Université Catholique de Louvain
Rainer von Sachs
Affiliation:
Université Catholique de Louvain
*
*Address correspondence to Giovanni Motta, Department of Quantitative Economics, Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper we propose a new approximate factor model for large cross-section and time dimensions. Factor loadings are assumed to be smooth functions of time, which allows considering the model as locally stationary while permitting empirically observed time-varying second moments. Factor loadings are estimated by the eigenvectors of a nonparametrically estimated covariance matrix. As is well known in the stationary case, this principal components estimator is consistent in approximate factor models if the eigenvalues of the noise covariance matrix are bounded. To show that this carries over to our locally stationary factor model is the main objective of our paper. Under simultaneous asymptotics (cross-section and time dimension go to infinity simultaneously), we give conditions for consistency of our estimators. A simulation study illustrates the performance of these estimators.

Type
ARTICLES
Information
Econometric Theory , Volume 27 , Issue 6 , December 2011 , pp. 1279 - 1319
Copyright
Copyright © Cambridge University Press 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Alexander, C.O. (2001) Orthogonal GARCH. In Alexander, C. O. (ed.), Mastering Risk, vol. 2, pp. 21–38. Prentice Hall.Google Scholar
Bai, J. (2003) Inferential theory for factor models of large dimensions. Econometrica 71(1), 135–171.CrossRefGoogle Scholar
Bai, J. & Ng, S. (2002) Determining the number of factors in approximate factor models. Econometrica 70(1), 191–221.CrossRefGoogle Scholar
Breitung, J. & Eickmeier, S. (2006) Dynamic factor models. In Hübler, O. and Frohn, J. (eds.), Modern Econometric Analysis. Springer.Google Scholar
Brockmann, M., Gasser, T., & Herrmann, E. (1993) Locally adaptive bandwidth choice for kernel regression estimators. Journal of the American Statistical Association 88, 1302–1309.CrossRefGoogle Scholar
Chamberlain, G. & Rothschild, M. (1983) Arbitrage, factor structure, and mean-variance analysis on large asset markets. Econometrica 51(5), 1281–1304.CrossRefGoogle Scholar
Chern, J.-L. & Dieci, L. (2000) Smoothness and periodicity of some matrix decompositions. SIAM Journal on Matrix Analysis and Applications 22(3), 772–792.CrossRefGoogle Scholar
Dahlhaus, R. (1996) Asymptotic statistical inference for nonstationary processes with evolutionary spectra. In Robinson, P.M. & Rosenblatt, M. (eds.), Athens Conference on Applied Probability and Time Series Analysis, vol. II. Springer-Verlag.Google Scholar
Dahlhaus, R. (1997) Fitting time series models to nonstationary processes. Annals of Statistics 25(1), 1–37.CrossRefGoogle Scholar
Dahlhaus, R. (2000) A likelihood approximation for locally stationary processes. Annals of Statistics 28(6), 1762–1794.CrossRefGoogle Scholar
Dahlhaus, R. & Subba Rao, S.S. (2006) Statistical inference for time-varying arch processes. Annals of Statistics 34(3), 1075–1114.CrossRefGoogle Scholar
Diebold, F.X. & Nerlove, M. (1989) The dynamics of exchange rate volatility: A multivariate latent factor arch model. Journal of Applied Econometrics 4, 1–21.CrossRefGoogle Scholar
Engle, R.F., Ng, V., & Rothschild, M. (1990) Asset pricing with a factor-arch structure: Empirical estimates for Treasury bills. Journal of Econometrics 45, 213–237.CrossRefGoogle Scholar
Fancourt, C.L. & Principe, J.C. (1998) Competitive principal components analysis for locally stationary time series. IEEE Transactions on Signal Processing 46, 3068–81.CrossRefGoogle Scholar
Forni, M., Hallin, M., Lippi, M., & Reichlin, L. (2000) The generalized dynamic factor model: Identification and estimation. Review of Economics and Statistics 82(4), 540–554.CrossRefGoogle Scholar
Forni, M., Hallin, M., Lippi, M., & Reichlin, L. (2005) The generalized dynamic factor model: One-sided estimation and forecasting. Journal of the American Statistical Association 100(471), 830–840.CrossRefGoogle Scholar
Forni, M. & Lippi, M. (2001) The generalized dynamic factor model: Representation theory. Econometric Theory 17, 1113–1141.CrossRefGoogle Scholar
Gasser, T., Kneip, A., & Köhler, W. (1991) A flexible and fast method for automatic smoothing. Journal of the American Statistical Association 86, 643–652.CrossRefGoogle Scholar
Hafner, C.M., van Dijk, D., & Franses, P.H. (2006) Semiparametric modeling of correlation dynamics. In Fomby, T. & Hill, C. (eds.), Advances in Econometrics, vol. 20, part A, pp. 59–103. Emerald Group.Google Scholar
Härdle, W., Herwartz, H., & Spokoiny, V. (2004) Time inhomogeneous multiple volatility modeling. Journal of Financial Econometrics 1, 55–95.CrossRefGoogle Scholar
Herrmann, E. (1997) Local bandwidth choice in kernel regression estimation. Journal of Computational and Graphical Statistics 6, 35–54.Google Scholar
Herzel, S., Stărică, C., & Tütüncü, R. (2006) A non-stationary paradigm for the dynamics of multivariate financial returns. In Bertail, P., Doukhan, P., & Soulier, P. (eds.), Statistics for Dependent Data, Lecture Notes in Statistics, vol. 187. Springer.Google Scholar
Kollo, T. & Neudecker, H. (1993) Asymptotics of eigenvalues and unit-length eigenvectors of sample variance and correlation matrices. Journal of Multivariate Analysis 47, 283–300.CrossRefGoogle Scholar
Lintner, J. (1965) The valuation of risky assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics 47, 13–37.CrossRefGoogle Scholar
Lütkepohl, H. (1996) Handbook of Matrices. Wiley.Google Scholar
Mikosch, T.. & Stărică, C. (2004) Nonstationarities in financial time series, the long-range dependence, and the IGARCH effects. Review of Economics and Statistics 86, 378–390.CrossRefGoogle Scholar
Phillips, P.C.B. & Moon, H.R. (1999) Linear regression limit theory for nonstationary panel data. Econometrica 67(5), 1057–1111.CrossRefGoogle Scholar
Rodríguez-Poo, J.M. & Linton, O. (2001) Nonparametric factor analysis of residual time series. Test 10, 161–182.CrossRefGoogle Scholar
Ross, S. (1976) The arbitrage theory of capital asset pricing. Journal of Economic Theory 13, 341–360.CrossRefGoogle Scholar
Sharpe, W. (1964) Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance 19, 425–442.Google Scholar
Stărică, C. & Granger, C. (2005) Nonstationarities in stock returns. Review of Economics and Statistics 87, 503–522.CrossRefGoogle Scholar
Stock, J.H. & Watson, M.W. (2002a) Forecasting using principal components from a large number of predictors. Journal of the American Statistical Association 97(460), 1167–1179.CrossRefGoogle Scholar
Stock, J.H. & Watson, M.W. (2002b) Macroeconomic forecasting using diffusion indexes. Journal of Business and Economic Statistics 20(2), 147–162.CrossRefGoogle Scholar