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Unstable Diffusion Indexes: With an Application to Bond Risk Premia

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  • Daniele Massacci

Abstract

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.

Suggested Citation

  • Daniele Massacci, 2019. "Unstable Diffusion Indexes: With an Application to Bond Risk Premia," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(6), pages 1376-1400, December.
    • Handle: RePEc:bla:obuest:v:81:y:2019:i:6:p:1376-1400
    DOI: 10.1111/obes.12311
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