Construction of China's Financial Condition Index and Analysis of Market Early Warning

Abstract

China has been facing a tense financial situation in recent years, the construction of financial condition index (CFCI), as an index integrating multivariate information, is of great practical significance to China's financial market for a promising forecast effect on macro economy. Most of the existing studies use similar six or seven indicators to construct financial condition index, which can't fully and accurately play its guiding role. This paper selects 15 indexes of 7 markets that affect the financial situation and constructs China's financial condition index by using dynamic factor model and Kalman filtering to complete the missing value. Furthermore, we utilize the time-varying parameter vector autoregressive model to explain how the change of financial condition index affects the macro-economy and analyze the fluctuation of different markets have caused to financial market which is of great significance for better monitoring and effective policy-making of China's financial market.