Bonsoo Koo, Benjamin Wong, Ze-Yu Zhong
arXiv 1 Mar 2023 · Statistics — Methodology · publishedJournal of Business and Economic Statistics (2025)
arXiv:2303.00178 · PDF · DOI · OpenAlex · Extracted main text
Through a routine normalization of the factor variance, standard methods for estimating factor models in macroeconomics do not distinguish between breaks of the factor variance and factor loadings. We argue that it is important to distinguish between structural breaks in the factor variance and loadings within factor models commonly employed in macroeconomics as both can lead to markedly different interpretations when viewed via the lens of the underlying dynamic factor model. We then develop a projection-based decomposition that leads to two standard and easy-to-implement Wald tests to disentangle structural breaks in the factor variance and factor loadings. Applying our procedure to U.S. macroeconomic data, we find evidence of both types of breaks associated with the Great Moderation and the Great Recession. Through our projection-based decomposition, we estimate that the Great Moderation is associated with an over 60% reduction in the total factor variance, highlighting the relevance of disentangling breaks in the factor structure.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Baltagi, Badi H. and Kao, Chihwa and Wang, Fa (2021) Estimating and Testing High Dimensional Factor Models with Multiple Structural Changes | 1.000 | 10 | 5 | 100% |
| 2 | Breitung, Jörg and Eickmeier, Sandra (2011) Testing for Structural Breaks in Dynamic Factor Models | 1.000 | 10 | 3 | 100% |
| 3 | Baltagi, Badi H. and Kao, Chihwa and Wang, Fa (2017) Identification and Estimation of a Large Factor Model with Structural Instability | 1.000 | 9 | 4 | 100% |
| 4 | Han, Xu and Inoue, Atsushi (2015) Tests for Parameter Instability in Dynamic Factor Models | 1.000 | 9 | 4 | 100% |
| 5 | Chen, Liang and Dolado, Juan J. and Gonzalo, Jesús (2014) Detecting Big Structural Breaks in Large Factor Models | 1.000 | 8 | 4 | 100% |
| 6 | Stock, James H. and Watson, Mark W (2009) Forecasting in Dynamic Factor Models Subject to Structural Instability | 0.928 | 4 | 3 | 100% |
| 7 | Bai, Jushan and Ng, Serena (2002) Determining the Number of Factors in Approximate Factor Models | 0.874 | 6 | 2 | 100% |
| 8 | Ahn, Seung C. and Horenstein, Alex R (2013) Eigenvalue Ratio Test for the Number of Factors | 0.874 | 5 | 2 | 100% |
| 9 | Stock, James H. and Watson, Mark W (2016) Chapter 8 - Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconom… | 0.874 | 5 | 2 | 100% |
| 10 | Bai, Jushan and Duan, Jiangtao and Han, Xu (2024) The Likelihood Ratio Test for Structural Changes in Factor Models | 0.843 | 3 | 3 | 100% |
Showing the top 10 of 42 scored citations.