Gathering Insights on the Forest from the Trees: A New Metric for Financial Conditions
42 Pages Posted: 31 Aug 2010
Date Written: August 24, 2010
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: Suggested Citation