Kapetanios, George and Price, Simon and Young, Garry (2018) A UK financial conditions index using targeted data reduction: forecasting and structural identification. Econometrics and Statistics, 7. pp. 1-17. DOI https://doi.org/10.1016/j.ecosta.2017.12.002
Kapetanios, George and Price, Simon and Young, Garry (2018) A UK financial conditions index using targeted data reduction: forecasting and structural identification. Econometrics and Statistics, 7. pp. 1-17. DOI https://doi.org/10.1016/j.ecosta.2017.12.002
Kapetanios, George and Price, Simon and Young, Garry (2018) A UK financial conditions index using targeted data reduction: forecasting and structural identification. Econometrics and Statistics, 7. pp. 1-17. DOI https://doi.org/10.1016/j.ecosta.2017.12.002
Abstract
A financial conditions index (FCI) is designed to summarise the state of financial markets. Two are constructed with UK data. The first is the first principal component of a set of financial indicators. The second comes from a new approach taking information from a large set of macroeconomic variables weighted by the joint covariance with a subset of the financial indicators (a set of spreads), using multivariate partial least squares, again using the first factor. The resulting FCIs are broadly similar. They both have some forecasting power for monthly GDP in a quasi-real-time recursive evaluation from 2011-2014 and outperform an FCI produced by Goldman Sachs. A second factor, that may be interpreted as a monetary conditions index, adds further forecast power, while third factors have a mixed effect on performance. The FCIs are used to improve identification of credit supply shocks in an SVAR. The main effects relative to an SVAR excluding an FCI of the (adverse) credit shock IRFs are to make the positive impact on in ation more precise and to reveal an increased positive impact on spreads.
Item Type: | Article |
---|---|
Uncontrolled Keywords: | Forecasting; Financial conditions index; Targeted data reduction; Multivariate partial least squares; Credit shocks |
Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HG Finance |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Essex Business School |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 02 Jan 2018 13:00 |
Last Modified: | 16 May 2024 19:10 |
URI: | http://repository.essex.ac.uk/id/eprint/20883 |
Available files
Filename: FCI_2017_final.pdf
Licence: Creative Commons: Attribution-Noncommercial-No Derivative Works 3.0