Identifying a financial conditions index for South Africa
AbstractThe global financial crisis that began in 2007-08 demonstrated how severe the impact of financial markets’ stress on real economic activity can be. In the wake of the financial crisis policy-makers and decision-makers across the world identified the critical need for a better understanding of financial conditions, and more importantly, their impact on the real economy. To this end, we have constructed a financial conditions index (FCI) for the South African economy, to enable the gauging of financial conditions and to better understand the macro-financial linkages in the country. The FCI is constructed using monthly data over the period 1966 to 2011, and is based on a set of sixteen financial variables, which include variables that define the state of international financial markets, asset prices, interest rate spreads, stock market yields and volatility, bond market volatility and monetary aggregates. We explore different methodologies for constructing the FCI, and find that rolling-window principal components analysis (PCA) yields the best result. We furthermore investigate whether it is beneficial to purge the FCI of the real effects of inflation, economic growth and interest rates, and use the identified FCI in in-sample causality testing with three macroeconomic variables.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201333.
Length: 20 pages
Date of creation: Jul 2013
Date of revision:
financial conditions; financial crisis; principal components;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kasai Ndahiriwe & Ruthira Naraidoo, 2011. "The Opportunistic approach to monetary policy and financial markets," Working Papers 201103, University of Pretoria, Department of Economics.
- David E. Rapach & Christian E. Weber, 2004. "Financial Variables and the Simulated Out-of-Sample Forecastability of U.S. Output Growth Since 1985: An Encompassing Approach," Economic Inquiry, Western Economic Association International, vol. 42(4), pages 717-738, October.
- Sydney C. Ludvigson & Serena Ng, 2009.
"Macro Factors in Bond Risk Premia,"
Review of Financial Studies,
Society for Financial Studies, vol. 22(12), pages 5027-5067, December.
- Kilian, Lutz, 1999. "Exchange Rates and Monetary Fundamentals: What Do We Learn from Long-Horizon Regressions?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 491-510, Sept.-Oct.
- Alberto Montagnoli & Oreste Napolitano, 2004.
"Financial Condition Index and interest rate settings: a comparative analysis,"
Money Macro and Finance (MMF) Research Group Conference 2004
1, Money Macro and Finance Research Group.
- Alberto Montagnoli & Oreste Napolitano, 2006. "Financial Condition Index and interest rate settings: a comparative analysis," Discussion Papers 2_2006, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
- Alberto Montagnoli & Oreste Napolitano, 2005. "Financial Condition Index And Interest Rate Settings: A Comparative Analysis," Working Papers 8_2005, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
- Gary Koop & Dimitris Korobilis, 2013.
"A new index of financial conditions,"
1307, University of Strathclyde Business School, Department of Economics.
- Koop, Gary & Korobilis, Dimitris, 2013. "A New Index of Financial Conditions," MPRA Paper 45463, University Library of Munich, Germany.
- Gary Koop & Dimitris Korobilis, . "A new index of financial conditions," Working Papers 2013_06, Business School - Economics, University of Glasgow.
- Gary, Koop & Dimitris, Korobilis, 2013. "A New Index of Financial Conditions," SIRE Discussion Papers 2013-48, Scottish Institute for Research in Economics (SIRE).
- Jan Hatzius & Peter Hooper & Frederic S. Mishkin & Kermit L. Schoenholtz & Mark W. Watson, 2010. "Financial Conditions Indexes: A Fresh Look after the Financial Crisis," NBER Working Papers 16150, National Bureau of Economic Research, Inc.
- Serena Ng & Pierre Perron, 1997.
"Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power,"
Boston College Working Papers in Economics
369, Boston College Department of Economics, revised 01 Sep 2000.
- Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
- Castro, Vítor, 2008.
"Are Central Banks following a linear or nonlinear (augmented) Taylor rule?,"
The Warwick Economics Research Paper Series (TWERPS)
872, University of Warwick, Department of Economics.
- Vítor Castro, 2008. "Are Central Banks following a linear or nonlinear (augmented) Taylor rule?," NIPE Working Papers 19/2008, NIPE - Universidade do Minho.
- Kirsten Thompson & Renee van Eyden & Rangan Gupta, 2013. "Testing the Out-of-Sample Forecasting Ability of a Financial Conditions Index for South Africa," Working Papers 201383, University of Pretoria, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rangan Gupta).
If references are entirely missing, you can add them using this form.