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Unstable Diffusion Indexes: With an Application to Bond Risk Premia
Author(s) -
Massacci Daniele
Publication year - 2019
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12311
Subject(s) - econometrics , risk premium , economics , factor analysis , inference , regression , estimation , bond , structural break , index (typography) , statistics , mathematics , computer science , management , finance , artificial intelligence , world wide web
This paper studies the empirically relevant problem of estimation and inference in diffusion index forecasting models with structural instability. Factor model and factor augmented regression both experience a structural change with different unknown break dates. In the factor model, we estimate factors and loadings by principal components. We consider least squares estimation of the factor augmented regression and propose a break test. The empirical application uncovers instabilities in the linkages between bond risk premia and macroeconomic factors.