Construction of Leading Index of Indian Economy: A Weighted-Cumulative Density Function Approach

Indrajit Roy and Dipankar Biswas

Journal of Quantitative Economics, 2012, vol. 10, issue 1, 17-31

Abstract: This paper constructs a composite index of leading indicator (CILI) for the monthly Index of Industrial Production (IIP) of Indian Economy, using large number of important economic indicators exhibiting leading capability to the target series. These indicators are transformed to percentile-scores by using empirical cumulative density function and CILI is constructed as weighted average. The weights are calculated using linear regression of the target series on the lag values of the individual indicators; thereafter, adjusted R-square values are used as the respective weights. The CILI was constructed based on both growth cycle (using Hodrick-Prescott Filter, and the frequency filters viz., Baxter-King, Christiano-Fitzerald Filters), as well as growth rate cycle techniques. It is observed that, the CILI based on growth rate cycle tracked the movement of IIP cycle well, as compared to the growth cycle method.

Date: 2012
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