Targeted financial conditions indices and growth-at-risk

Fernando Eguren-Martin, Sevim Kösem, Guido Maia and Andrej Sokol
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Fernando Eguren-Martin: SPX Capital
Sevim Kösem: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH
Guido Maia: Centre for Macroeconomics and London School of Economics
Authors registered in the RePEc Author Service: Fernando Eguren Martin

No 1084, Bank of England working papers from Bank of England

Abstract: We propose a novel approach to extract factors from large data sets that maximise covariation with the quantiles of a target distribution of interest. From the data underlying the Chicago Fed’s National Financial Conditions Index, we build targeted financial conditions indices for the quantiles of future US GDP growth. We show that our indices yield considerably better out-of-sample density forecasts than competing models, as well as insights on the importance of individual financial series for different quantiles. Notably, leverage indicators appear to co-move more with the median of the predictive distribution, while credit and risk indicators are more informative about downside risks.

Keywords: Quantile regression; factor analysis; financial conditions indices; GDP-at-risk (search for similar items in EconPapers)
JEL-codes: C32 C38 C53 C58 E37 E44 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2024-08-06
New Economics Papers: this item is included in nep-ecm, nep-fdg, nep-ifn and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1084

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