Finance and Economics Discussion Series (FEDS)

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May 2013

Assessing and Combining Financial Conditions Indexes

Sirio Aramonte, Samuel Rosen, and John W. Schindler

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 non-synchronous trading. Financial conditions indexes are based on a variety of constituent variables and aggregation methods, and we discuss a simple procedure for consolidating the growing number of different indexes into a single proxy for financial conditions.

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Keywords: Financial conditions indexes, stock returns predictability, forecasting

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Last Update: June 26, 2020