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arXiv · 1708.02786

Sequential testing for structural stability in approximate factor models

Matteo Barigozzi·Lorenzo Trapani
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Abstract

We develop a monitoring procedure to detect changes in a large approximate factor model. Letting $r$ be the number of common factors, we base our statistics on the fact that the $\left( r+1\right) $-th eigenvalue of the sample covariance matrix is bounded under the null of no change, whereas it becomes spiked under changes. Given that sample eigenvalues cannot be estimated consistently under the null, we randomise the test statistic, obtaining a sequence of \textit{i.i.d} statistics, which are used for the monitoring scheme. Numerical evidence shows a very small probability of false detections, and tight detection times of change-points.

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Matteo Barigozzi, Lorenzo Trapani. 2017-08-09. Sequential testing for structural stability in approximate factor models. https://doi.org/10.1016/j.spa.2020.03.003

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