Gathering insights on the forest from the trees: a new metric for financial conditions
AbstractBy incorporating the Harvey accumulator into the large approximate dynamic factor framework of Doz et al. (2006), we are able to construct a coincident index of financial conditions from a large unbalanced panel of mixed frequency financial indicators. We relate our financial conditions index, or FCI, to the concept of a "financial crisis" using Markov-switching techniques. After demonstrating the ability of the index to capture "crisis" periods in U.S. financial history, we present several policy-geared threshold rules for the FCI using Receiver Operator Characteristics (ROC) curve analysis.
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Date of creation: 2010
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-25 (All new papers)
- NEP-CBA-2010-09-25 (Central Banking)
- NEP-RMG-2010-09-25 (Risk Management)
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