A new index of financial conditions

Gary Koop, Dimitris Korobilis

Research output: Contribution to journalArticle

46 Citations (Scopus)
187 Downloads (Pure)

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 key US macroeconomic variables. Time-variation in the models׳ 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 financial conditions index 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.
Original languageEnglish
Pages (from-to)101-116
Number of pages16
JournalEuropean Economic Review
Volume71
Early online date5 Aug 2014
DOIs
Publication statusPublished - 1 Oct 2014

Keywords

  • forecasting
  • dual Kalman filter
  • dynamic factor model
  • Bayesian model averaging

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