Working Paper

Abstract

This paper tackles the identification and estimation of a high dimensional factor model with unknown number of latent factors and a single break in the number of factors and/or factor loadings occurring at unknown common date. First, the authors propose a least squares estimator of the change point based on the second moments of estimated pseudo factors and show that the estimation error of the proposed estimator is Op(1). They also show that the proposed estimator has some degree of robustness to misspecification of the number of pseudo factors. With the estimated change point plugged in, consistency of the estimated number of pre and post-break factors and convergence rate of the estimated pre and post-break factor space are then established under fairly general assumptions. The finite sample performance of our estimators is investigated using Monte Carlo experiments.