Gathering Insights on the Forest from the Trees: A New Metric for Financial Conditions

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract By incorporating the Harvey accumulator into the large approximate dynamic factor framework of Doz et al. (2006), we are able to construct a coincident index of financial conditions from a large unbalanced panel of mixed frequency financial indicators. We relate our financial conditions index, or FCI, to the concept of a "financial crisis" using Markov-switching techniques. After demonstrating the ability of the index to capture "crisis" periods in U.S. financial history, we present several policy-geared threshold rules for the FCI using Receiver Operator Characteristics (ROC) curve analysis. Terms of use: Documents in EconStor mayJEL Code: G01, G17, C22

Using financial indicators to predict turning points in the business cycle: The case of the leading economic index for the United States

“…This is the approach taken by Brave and Butters (2010) and Hatzius et al (2010). However, the apparent lack of a stable relationship between the credit cycle and the business cycle, and the reliance of such indexes on econometric estimation given the available data, suggest that such indexes could add noise to the LEI, especially in a real-time setting.…”

“…The 2008-2009 global recession and recovery highlight the importance of understanding these linkages better. Recent research, such as that of Brave and Butters (2010) and Hatzius, Hooper, Mishkin, Schoenholtz, and Watson (2010), among others, has also explored some of these issues and developed measures of aggregate financial conditions and financial stress or instability. Several new indexes of financial conditions and financial stability have been proposed in the recent literature.…”

A Financial Systemic Stress Index for Greece

“…-Greek Banks CDS spreads: We use the average 5-year Credit Default Swap (CDS) spread of the four biggest Greek banks as a proxy of their credit risk (see also Brave and Butters, 2010). 6 The CDS spread can be defined the annual cost for protection against a default of a company or a sovereign (Hull et al, 2004) and thus it is regarded as an appropriate measure for a marketbased price for credit risk.…”

“…Bordo et al, 2001;Hanschel and Monnin, 2005;Garderelli et al, 2009), factor analysis using the principal components method (Illing and Liu, 2006;Hakkio and Keeton;2009, Hatzius et al, 2009), logit models to construct a stress index that shows the probability of stress (Nelson and Perli, 2007; Grinaldi 2010) and, recently, portfolio theory based aggregation schemes that take into account the correlation structure of stress indicators in order to quantify the level of systemic stress (Hollo et al, 2012). Finally, Brave and Butters (2010) have proposed a state space representation of the level of financial stress.…”

Financial Conditions Indexes for Asian Economies

“…quantity-and survey-based credit indicators). Brave andButters (2010, 2011) augment the PCA approach and segue into a dynamic factor framework in order to come up with a highfrequency index that uses information from 100 financial indicators capturing developments in US money markets, debt and equity markets, and the banking system.…”