Fundamental Drivers of Financial Conditions

We propose a structural framework to uncover the key forces shaping global asset prices and financial conditions. Our approach identifies seven distinct shocks: four U.S.-centric (growth, monetary policy, common risk premium, and a novel dollar-hedging risk), alongside a global hedging risk premium, a China-growth shock and an emerging market-specific risk premium shock. Using daily financial data from 2010–2025, we estimate a Structural VAR to trace how these shocks propagate across advanced and emerging economies. Our contributions are threefold. First, we introduce a real-time monitoring tool that provides structural interpretation and scenario analysis, equipping policymakers with a unified lens to assess asset price dynamics. Second, we improve shock identification through three innovations: (i) incorporating the dollar-hedging risk shock to explain anomalies observed since 2025, (ii) improving U.S. shock identification by leveraging non-U.S. data, and (iii) highlighting the pivotal role of Chinagrowth shocks in shaping emerging-market conditions. Finally, we develop a novel Financial Conditions Index (FCI) grounded in structural shocks, enabling country-specific assessments and enhancing interpretability. Unlike traditional FCIs, our index directly links financial conditions to their economic drivers, improving realtime monitoring and outperforming existing alternatives in nowcasting economic activity.