Tests for Group-Specific Heterogeneity in High-Dimensional Factor Models

Abstract: Standard high-dimensional factor models assume that the comovements in a large set of variables could be modeled using a small number of latent factors that affect all variables. In many relevant applications in economics and finance, heterogenous comovements specific to some known groups of variables naturally arise, and reflect distinct cyclical movements within those groups. This paper develops two new statistical tests that can be used to investigate whether there is evidence supporting group-specific heterogeneity in the data. The first test statistic is designed for the alternative hypothesis of group-specific heterogeneity appearing in at least one pair of groups; the second is for the alternative of group-specific heterogeneity appearing in all pairs of groups. We show that the second moment of factor loadings changes across groups when heterogeneity is present, and use this feature to establish the theoretical validity of the tests. We also propose and prove the validity of a permutation approach for approximating the asymptotic distributions of the two test statistics. The simulations and the empirical financial application indicate that the proposed tests are useful for detecting group-specific heterogeneity.

Date: 2021-09, Revised 2022-02
New Economics Papers: this item is included in nep-ecm and nep-isf
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/2109.09049 Latest version (application/pdf)

Related works:
Journal Article: Tests for group-specific heterogeneity in high-dimensional factor models (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2109.09049

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().