Evaluating the Information Value for Measures of Systemic Conditions

34 Pages Posted: 10 Aug 2015

See all articles by Mikhail V. Oet

Mikhail V. Oet

Case Western Reserve University - Weatherhead School of Management; Federal Reserve Banks - Federal Reserve Bank of Cleveland

John Dooley

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Dieter Gramlich

Baden-Wuerttemberg Cooperative State University Mosbach (DHBW)

Peter Sarlin

Hanken School of Economics; RiskLab Finland

Stephen J. Ong

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Date Written: August 10, 2015

Abstract

Timely identification of coincident systemic conditions and forward-looking capacity to anticipate adverse developments are critical for macroprudential policy. Despite clear recognition of these factors in literature, an evaluation methodology and empirical tests for the information value of coincident measures are lacking. This paper provides a twofold contribution to the literature: (i) a general-purpose evaluation framework for assessing information value for measures of systemic conditions, and (ii) an empirical assessment of the information value for several alternative measures of US systemic conditions. We find substantial differences among the measures, of which the Cleveland Financial Stress Index shows best-in-class identification performance. In terms of forecasting performance, Kamakura’s Troubled Company Index, Cleveland Financial Stress Index, and Goldman Sachs Financial Conditions Index show moderately stable usefulness metrics over time.

Keywords: Information value; Systemic conditions; Coincident measures; Early warning; Macroprudential policy

JEL Classification: G01; G18; G28; E32; E37

Suggested Citation

Oet, Mikhail V. and Dooley, John and Gramlich, Dieter and Sarlin, Peter and Ong, Stephen J., Evaluating the Information Value for Measures of Systemic Conditions (August 10, 2015). FRB of Cleveland Working Paper No. 15-13, Available at SSRN: https://ssrn.com/abstract=2641892

Mikhail V. Oet (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
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216.579.2932 (Fax)

John Dooley

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Dieter Gramlich

Baden-Wuerttemberg Cooperative State University Mosbach (DHBW) ( email )

Lohrtalweg 10
Mosbach, 74821
Germany

Peter Sarlin

Hanken School of Economics

PO Box 479
FI-00101 Helsinki
Finland

RiskLab Finland ( email )

Turku, 20520
Finland

HOME PAGE: http://risklab.fi/people/peter/

Stephen J. Ong

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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