| By: |
Arrigoni, Simone;
Bobasu, Alina;
Venditti, Fabrizio |
| Abstract: |
In this paper we assess the merits of financial condition indices constructed
using simple averages versus a more sophisticated alternative that uses factor
models with time varying parameters. Our analysis is based on data for 18
advanced and emerging economies at a monthly frequency covering about 70% of
the world's GDP.We assess the performance of these indicators based on their
ability to capture tail risk for economic activity and to predict banking and
currency crises. We find that averaging across the indicators of interest,
using judgmental but intuitive weights, produces financial condition indices
that are not inferior to, and actually perform better than, those constructed
with more sophisticated statistical methods. An indicator that gives more
weight to measures of financial stress, which we term WA-FSI, emerges as the
best indicator for anticipating banking crisis, and is therefore better suited
for financial stability. |
| Keywords: |
financial conditions,quantile regressions,banking crises,SVARs,spillovers |
| JEL: |
E32 E44 C11 C55 |
| Date: |
2021 |
| URL: |
http://d.repec.org/n?u=RePEc:zbw:eibwps:202110&r= |