A New Index of Financial Conditions

34 Pages Posted: 6 Jan 2014

See all articles by Gary Koop

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics

Dimitris Korobilis

University of Glasgow - Adam Smith Business School

Date Written: December 1, 2013

Abstract

We use factor augmented vector autoregressive models with time-varying coefficients and stochastic volatility, to construct a financial conditions index that can accurately track expectations about growth in US GDP and unemployment. Time-variation in the model's parameters allows for the weights attached to each financial variable in the index to evolve over time. Furthermore, we develop methods for dynamic model averaging or selection which allow the financial 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 financial variables.

Suggested Citation

Koop, Gary and Korobilis, Dimitris, A New Index of Financial Conditions (December 1, 2013). Available at SSRN: https://ssrn.com/abstract=2374980 or http://dx.doi.org/10.2139/ssrn.2374980

Gary Koop

University of Strathclyde, Glasgow - Strathclyde Business School - Department of Economics ( email )

100 Cathedral Street
Glasgow G4 0LN
United Kingdom

Dimitris Korobilis (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

40 University Avenue
Gilbert Scott Building
Glasgow, Scotland G12 8QQ
United Kingdom

HOME PAGE: http://https://sites.google.com/site/dimitriskorobilis/

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