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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 coe¢ cients to construct a nancial conditions index. The time-variation in the parameters allows for the weights attached to each nancial variable in the index to evolve over time. Furthermore, we develop methods for dynamic model averaging or selection which allow the nancial 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 nancial variables.

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File URL: http://www.gla.ac.uk/media/media_271007_en.pdf
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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2013_06.

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Handle: RePEc:gla:glaewp:2013_06
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  28. repec:hal:journl:peer-00844811 is not listed on IDEAS
  29. repec:hal:journl:hal-00638009 is not listed on IDEAS
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  35. 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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