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

EI Seminar
Campus with students

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.

See also

Pricing ultra-short-term volatility surfaces

Federico Bandi (Johns Hopkins University)
Image of campus Woudestein
More information

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

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