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We use factor augmented vector autoregressive models with time-varying coefficient to construct a financial conditions index. The time-variation in the 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.
|Place of Publication||Glasgow|
|Publisher||University of Strathclyde|
|Number of pages||25|
|Publication status||Published - 12 Mar 2013|
- financial stress
- dynamic model averaging