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Assessing and Combining Financial Conditions Indexes

Sirio Aramonte, Samuel Rosen and John W. Schindler
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Samuel Rosen: University of North Carolina at Chapel Hill, Kenan-Flagler Business School
John W. Schindler: Federal Reserve Board

International Journal of Central Banking, 2017, vol. 13, issue 1, 1-52

Abstract: We evaluate the short-horizon predictive ability of financial conditions indexes for stock returns and macroeconomic variables. We find reliable predictability only when the sample includes the 2008 financial crisis, and we argue that this result is driven by tailoring the indexes to the crisis and by nonsynchronous trading. In addition, we suggest a simple procedure for aggregating the various indexes into a single proxy for financial conditions, which can help to reduce the uncertainty faced by policymakers when monitoring financial conditions.

Date: 2017
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Working Paper: Assessing and combining financial conditions indexes (2013) Downloads
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