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Social and Behavioral Sciences Commons

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Research Collection School Of Economics

2020

Factor model

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Full-Text Articles in Social and Behavioral Sciences

Testing For Structural Changes In Factor Models Via A Nonparametric Regression, Liangjun Su, Xia Wang Dec 2020

Testing For Structural Changes In Factor Models Via A Nonparametric Regression, Liangjun Su, Xia Wang

Research Collection School Of Economics

We propose a model-free test for structural changes in factor models. The basic idea is to regress the data on commonly estimated factors by local smoothing and compare the fitted values of time-varying factor loadings with those of time-invariant factor loadings estimated via principal component analysis. By construction, the test is designed to be powerful against both smooth structural changes and sudden structural breaks with a possibly unknown number of breaks and unknown break dates in the factor loadings. No restrictions on the form of alternatives or trimming of boundary regions near the beginning or end of the sample period …


Forecasting Large Covariance Matrix With High-Frequency Data: A Factor Approach For The Correlation Matrix, Yingjie Dong, Yiu Kuen Tse Oct 2020

Forecasting Large Covariance Matrix With High-Frequency Data: A Factor Approach For The Correlation Matrix, Yingjie Dong, Yiu Kuen Tse

Research Collection School Of Economics

We apply the factor approach to the correlation matrix to forecast large covariance matrix of asset returns using high-frequency data, using the principal component method to model the underlying latent factors of the correlation matrix. The realized variances are separately forecasted using the Heterogeneous Autoregressive model. The forecasted variances and correlations are then combined to forecast large covariance matrix. Our proposed method is found to perform better in reporting smaller forecast errors than some selected competitors. Empirical application to a portfolio of 100 NYSE and NASDAQ stocks shows that our method provides lower out-of-sample realized variance in selecting global minimum …