A new index of financial conditions

Koop, G. and Korobilis, D. (2014) A new index of financial conditions. European Economic Review, 71, pp. 101-116. (doi: 10.1016/j.euroecorev.2014.07.002)

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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 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 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.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Korompilis Magkas, Professor Dimitris
Authors: Koop, G., and Korobilis, D.
Subjects:H Social Sciences > HA Statistics
H Social Sciences > HG Finance
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:European Economic Review
ISSN (Online):1873-572X
Copyright Holders:Copyright © 2014 Elsevier
First Published:First published in European Economic Review 71:101-116
Publisher Policy:Reproduced in accordance with the publisher copyright policy

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