Testing for Instability in Covariance Sturctures

Author(s)/Creator(s)

Chihwa Kao, Syracuse University
Lorenzo Trapani, Cass Business School
Giovanni Urga, Cass Business School and Università di Bergamo

Description/Abstract

We propose a test for the stability over time of the covariance matrix of multivariate time series. The analysis is extended to the eigensystem to ascertain changes due to instability in the eigenvalues and/or eigenvectors. Using strong Invariance Principle and Law of Large Numbers, we normalize the CUSUM-type statistics to calculate their supremum over the whole sample. The power properties of the test versus local alternatives and alternatives close to the beginning/end of sample are investigated theoretically and via simulation. The testing procedure is validated through an application to 18 US interest rates over 1997-2011, finding instability at the end-2007/beginning-2008.

Document Type

Working Paper

Date

4-2012

Keywords

Covariance Matrix, Eigensystem, Changepoint, Term Structure of Interest Rates, CUSUM statistic

Series

Working Papers Series

Disciplines

Economics

Additional Information

Working paper no. 131

Recommended Citation

Kao, Chihwa; Trapani, Lorenzo; and Urga, Giovanni, "Testing for Instability in Covariance Sturctures" (2012). Center for Policy Research. 160.
https://surface.syr.edu/cpr/160

Source

local input

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.