Optimal Maximin GMM Tests for Sphericity in Latent Factor Analysis of Short Panels

EI Seminar
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We derive optimal maximin tests for parametric hypotheses in short panels with latent common factors. We rely on a Generalized Method of Moments setting with optimal weighting under a large cross-sectional dimension n and a fixed time series dimension T.

Speaker
Patrick Gagliardini
Date
Wednesday 22 Oct 2025, 12:00 - 13:00
Type
Seminar
Room
ET-14
Location
Campus Woudestein
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With Alain-Philippe Fortin, Olivier Scaillet

We outline the asymptotic distributions of the estimators as well as the asymptotic maximin optimality of the Wald, Lagrange Multiplier, and Likelihood Ratio-type tests. The characterisation of optimality relies on finding the limit Gaussian experiment in strongly identified GMM models under a block-dependence structure and unobserved heterogeneity. We reject sphericity of idiosyncratic errors in an empirical application to a large cross-section of U.S. stocks, which casts doubt on the validity of routinely applying Principal Component Analysis to short panels of monthly financial returns.

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For more information please contact the Secretariat Econometrics at eb-secr@ese.eur.nl

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