Financial Condition Indices in an Incomplete Data Environment

Vol: 
42/2023
Author name: 
Herculano M
Jacob P
Year: 
2023
Month: 
August
Abstract: 

We construct a Financial Conditions Index (FCI) for the United States using a dataset that features many missing observations. The novel combination of probabilistic principal component techniques and a Bayesian factor-augmented VAR model resolves the challenges posed by data points being unavailable within a high-frequency dataset. Even with up to 62% of the data missing, the new approach yields a less noisy FCI that tracks the movement of 22 underlying financial variables more accurately both in-sample and out-of-sample.

Publication file: 

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