On time-varying factor models: Estimation and testing

• Published in: Journal of econometrics Vol. 198; no. 1; pp. 84 - 101
• Main Authors: Su, Liangjun, Wang, Xia
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.05.2017; Elsevier Sequoia S.A
• Subjects: Change agents; Convergence; data collection; econometric models; economic analysis; Economic models; economic theory; estimation; Factor model; Information criterion; Local principal component; Local smoothing; macroeconomics; Null hypothesis; Power; Property; Structural change; Test; Time-varying parameter; United States; Validity; United States; Local principal component; C33; Factor model; C12; Information criterion; Test; C14; C38; Time-varying parameter; Local smoothing; Structural change

Conventional factor models assume that factor loadings are fixed over a long horizon of time, which appears overly restrictive and unrealistic in applications. In this paper, we introduce a time-varying factor model where factor loadings are allowed to change smoothly over time. We propose a local v...