Composing High-Frequency Financial Conditions Index and Implications for Economic Activity

Abdullah Kazdal, Halil Korkmaz () and Muhammed Hasan Yilmaz

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: In this study, the main aim is to construct an index using high-frequency data related to financial markets and intermediation services for Turkey, termed as High-Frequency Financial Conditions Index by employing alternative statistical techniques. In a complementary manner, the informative nature of the constructed indices with respect to the course of economic activity is examined. The paper also includes detailed empirical analysis about the relationship between financial conditions and growth tendencies. The findings of the time series analysis and forecast exercises show that the constructed series are quite informative regarding the economic activity. More importantly, probit model estimations indicate that index can be qualified as an early indicator to predict �loss of momentum� episodes in economic growth by also considering the lead-lag relationship. When similar methodology is applied on emerging market economies, indices can be produced with a high level of co-movements with growth indicators. Panel Vector Autoregression estimation shows that, after controlling for country-specific characteristics, a shock coming to financial conditions is creating a significant overall response in emerging market countries. In terms of policy-making, we believe that constructed indices will contribute to a better understanding of the current financial environment and relation with economic activity.

Keywords: Financial conditions; Growth dynamics; Factor models; Forecasting; Probit models; Panel VAR (search for similar items in EconPapers)
JEL-codes: E17 E44 E66 G10 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ara and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1926

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