Diffusion Index Models and Index Proxies: Recent Results and New Directions
European Journal of Pure and Applied Mathematics, Vol. 3, No. 3, 2010, 478-501
24 Pages Posted: 15 Jul 2013
Date Written: 2010
Abstract
Diffusion index models have received considerable attention from both theoreticians and empirical econometricians in recent years. One reason for this is that datasets with many variables are increasingly becoming available and being utilized for economic modelling, and another is that common factors are often assumed to underlie the co-movements of a set of macroeconomic variables. In this paper we review some recent results in the study of diffusion index models. We discuss, for example, the construction of factors used in prediction models implemented using diffusion index methodology and approaches that are useful for assessing whether there are observable variables that adequately “proxy” for estimated factors.
Keywords: diffusion index, factor, forecast, macroeconometrics, parameter estimation error, proxy
JEL Classification: M10
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