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Targeted financial conditions indices and growth-at-risk

Author

Listed:
  • Eguren-Martin, Fernando

    (SPX Capital)

  • Kösem, Sevim

    (Bank of England)

  • Maia, Guido

    (Centre for Macroeconomics and London School of Economics)

  • Sokol, Andrej

    (Bloomberg LP)

Abstract

We propose a novel approach to extract factors from large data sets that maximise covariation with the quantiles of a target distribution of interest. From the data underlying the Chicago Fed’s National Financial Conditions Index, we build targeted financial conditions indices for the quantiles of future US GDP growth. We show that our indices yield considerably better out-of-sample density forecasts than competing models, as well as insights on the importance of individual financial series for different quantiles. Notably, leverage indicators appear to co-move more with the median of the predictive distribution, while credit and risk indicators are more informative about downside risks.

Suggested Citation

  • Eguren-Martin, Fernando & Kösem, Sevim & Maia, Guido & Sokol, Andrej, 2024. "Targeted financial conditions indices and growth-at-risk," Bank of England working papers 1084, Bank of England.
  • Handle: RePEc:boe:boeewp:1084
    as

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    References listed on IDEAS

    as
    1. Fernando Eguren-Martin & Andrej Sokol, 2022. "Attention to the Tail(s): Global Financial Conditions and Exchange Rate Risks," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(3), pages 487-519, September.
    2. Mr. Nicolas Arregui & Mr. Selim A Elekdag & Mr. Gaston Gelos & Romain Lafarguette & Dulani Seneviratne, 2018. "Can Countries Manage Their Financial Conditions Amid Globalization?," IMF Working Papers 2018/015, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Quantile regression; factor analysis; financial conditions indices; GDP-at-risk;
    All these keywords.

    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; State Space Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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