Gathering Insights on the Forest from the Trees: A New Metric for Financial Conditions

42 Pages Posted: 31 Aug 2010

See all articles by Scott A. Brave

Scott A. Brave

Federal Reserve Bank of Chicago

R. Butters

Indiana University

Date Written: August 24, 2010

Abstract

By incorporating the Harvey accumulator into the large approximate dynamic factor framework of Doz et al. (2006), we are able to construct a coincident index of financial conditions from a large unbalanced panel of mixed frequency financial indicators. We relate our financial conditions index, or FCI, to the concept of a "financial crisis" using Markov-switching techniques. After demonstrating the ability of the index to capture "crisis" periods in U.S. financial history, we present several policy-geared threshold rules for the FCI using Receiver Operator Characteristics (ROC) curve analysis.

Keywords: financial crisis, financial conditions, dynamic factor, EM algorithm, Harvey accumulator, ROC curve, Markov-switching

JEL Classification: G01, G17, C22

Suggested Citation

Brave, Scott A. and Butters, R., Gathering Insights on the Forest from the Trees: A New Metric for Financial Conditions (August 24, 2010). FRB of Chicago Working Paper No. 2010-07. Available at SSRN: https://ssrn.com/abstract=1668786 or http://dx.doi.org/10.2139/ssrn.1668786

Scott A. Brave (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

R. Butters

Indiana University ( email )

1309 E. Tenth St.
Bloomington, IN 47405
United States

HOME PAGE: http://https://kelley.iu.edu/BEPP/faculty/page14113.cfm?ID=46947

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