Abstract
When the Temporal Factor Analysis (TFA) model is used for classical Arbitrage Pricing Theory (APT) analysis in finance, it is necessary to perform white noise tests on the residual in order to validate the model adequacy. We carry out white noise tests and obtain results that provide assurance for further statistical analysis using the TFA model. We also explore empirically the relationship between macroeconomic time series and Gaussian statistically uncorrelated hidden factors recovered by TFA. Based on the statistical hypothesis test results, we conclude that each of the four economic time series is linearly related to the uncorrelated factors. Consequently, APT economic factors can be synthesized from those statistically uncorrelated factors.
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