Assessing and Combining Financial Conditions Indexes
by Sirio Aramontea, Samuel Rosenb and John W. Schindlera
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.
JEL Codes: E32, G01, G17.
Full article (PDF, 52 pages, 2189 kb)
a Federal Reserve Board
b University of North Carolina at Chapel Hill, Kenan-Flagler Business School