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A New Index of Financial Conditions

Listed author(s):
  • Gary, Koop
  • Dimitris, Korobilis

We use factor augmented vector autoregressive models with time-varying coefficients to construct a financial conditions index. The time-variation in the parameters allows for the weights attached to each financial variable in the index to evolve over time. Furthermore, we develop methods for dynamic model averaging or selection which allow the financial variables entering into the FCI to change over time. We discuss why such extensions of the existing literature are important and show them to be so in an empirical application involving a wide range of financial variables.

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File URL: http://hdl.handle.net/10943/475
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Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2013-48.

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Date of creation: 2013
Handle: RePEc:edn:sirdps:475
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  7. Dimitris Korobilis, 2013. "Assessing the Transmission of Monetary Policy Using Time-varying Parameter Dynamic Factor Models-super-," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(2), pages 157-179, 04.
  8. Eickmeier, Sandra & Lemke, Wolfgang & Marcellino, Massimiliano, 2011. "Classical time-varying FAVAR models - estimation, forecasting and structural analysis," Discussion Paper Series 1: Economic Studies 2011,04, Deutsche Bundesbank, Research Centre.
  9. Matheson, Troy D., 2012. "Financial conditions indexes for the United States and euro area," Economics Letters, Elsevier, vol. 115(3), pages 441-446.
  10. Bates, Brandon J. & Plagborg-Møller, Mikkel & Stock, James H. & Watson, Mark W., 2013. "Consistent Factor Estimation in Dynamic Factor Models with Structural Instability," Scholarly Articles 28469786, Harvard University Department of Economics.
  11. Breitung, Jörg & Eickmeier, Sandra, 2011. "Testing for structural breaks in dynamic factor models," Journal of Econometrics, Elsevier, vol. 163(1), pages 71-84, July.
  12. Angela Abbate & Sandra Eickmeier & Wolfgang Lemke & Massimiliano Marcellino, 2016. "The Changing International Transmission of Financial Shocks: Evidence from a Classical Time‐Varying FAVAR," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(4), pages 573-601, 06.
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  16. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 147-162, April.
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  19. Esteban Gómez & Andrés Murcia & Nancy Zamundio, 2011. "Financial Conditions Index: Early and Leading Indicator for Colombia," Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 29(66), pages 174-220, Diciembre.
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  21. Anindya Banerjee & Massimiliano Marcellino & Igor Masten, 2008. "Forecasting Macroeconomic Variables Using Diffusion Indexes in Short Samples with Structural Change," Working Papers 334, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  22. Garratt, Anthony & Koop, Gary & Mise, Emi & Vahey, Shaun P., 2009. "Real-Time Prediction With U.K. Monetary Aggregates in the Presence of Model Uncertainty," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 480-491.
  23. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
  24. 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.
  25. Castelnuovo, Efrem, 2013. "Monetary policy shocks and financial conditions: A Monte Carlo experiment," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 282-303.
  26. Scott Brave & R. Andrew Butters, 2011. "Monitoring financial stability: a financial conditions index approach," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 22-43.
  27. Antonello D'Agostino & Luca Gambetti & Domenico Giannone, 2013. "Macroeconomic forecasting and structural change," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(1), pages 82-101, 01.
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  30. Marco Del Negro & Christopher Otrok, 2008. "Dynamic factor models with time-varying parameters: measuring changes in international business cycles," Staff Reports 326, Federal Reserve Bank of New York.
  31. Stephan Danninger & Irina Tytell & Ravi Balakrishnan & Selim Elekdag, 2009. "The Transmission of Financial Stress from Advanced to Emerging Economies," IMF Working Papers 09/133, International Monetary Fund.
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  34. Meligkotsidou, Loukia & Vrontos, Ioannis D., 2008. "Detecting structural breaks and identifying risk factors in hedge fund returns: A Bayesian approach," Journal of Banking & Finance, Elsevier, vol. 32(11), pages 2471-2481, November.
  35. William English & Kostas Tsatsaronis & Edda Zoli, 2005. "Assessing the predictive power of measures of financial conditions for macroeconomic variables," BIS Papers chapters,in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 228-52 Bank for International Settlements.
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