Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2025-03-07
Number: 25-016/III
Author-Name: Federico Carlini
Author-Workplace-Name: LUISS Business School
Author-Name: Mirco Rubin
Author-Workplace-Name: EDHEC Business School
Author-Name: Pierluigi Vallarino
Author-Workplace-Name: Erasmus University Rotterdam and Tinbergen Institute
Title: New rank-based tests and estimators for Common Primitive Shocks
Abstract: We propose a new rank-based test for the number of common primitive shocks, q, in large panel data. After estimating a VAR(1) model on r static factors extracted by principal component analysis, we estimate the number of common primitive shocks by testing the rank of the VAR residuals’ covariance matrix. The new test is based on the asymptotic distribution of the sum of the smallest r − q eigenvalues of the residuals’ covariance matrix. We develop both plug-in and bootstrap versions of this eigenvalue-based test. The eigenvectors associated to the q largest eigenvalues allow us to construct an easy-to-implement estimator of the common primitive shocks. We illustrate our testing and estimation procedures with applications to panels of macroeconomic variables and individual stocks’ volatilities.
Classification-JEL: C12, C23, C38
Keywords:
File-URL: https://papers.tinbergen.nl/25016.pdf
File-Format: application/pdf
File-Size: 1.903.734 bytes
Handle: RePEc:tin:wpaper:20250016