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A0267
Title: A financial conditions index using targeted data reduction Authors:  Garry Young - Bank of England (United Kingdom) [presenting]
Simon Price - ()
George Kapetanios - Kings College, University of London (United Kingdom)
Abstract: Financial conditions indices (FCIs) aim to summarise the state of financial markets. We construct two types of measure: a principal component of a medium sized set of relevant financial indicators and an alternative that takes information from a large set of macroeconomic variables weighted by the joint covariance with subsets of financial indicators, using multiple partial least squares (MPLS). Our approach aims to weight latent factors from a macroeconomic data set using information from financial variables. Both are useful for forecasting monthly GDP, but the MPLS based FCIs are superior to that based on the PC.