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A new index of financial conditions

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  • Gary Koop
  • Dimitris Korobilis

Abstract

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.

Suggested Citation

  • Gary Koop & Dimitris Korobilis, "undated". "A new index of financial conditions," Working Papers 2013_06, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2013_06
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    File URL: http://www.gla.ac.uk/media/media_271007_en.pdf
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    More about this item

    Keywords

    financial stress; dynamic model averaging; forecasting;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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
    • 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

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