Building the FTSE Russell financial conditions indicator

Key takeaways:

• By avoiding black box construction, and large numbers of variables, the FTSE Russell financial conditions indicators (FCIs) allow underlying shocks and investment narratives to be detected
• They are built by using intuitive macro-economic and financial variables for major economies
• The FCIs are not designed as economic or financial forecasting tools, but to measure financial conditions accurately at a given point in time

Points of differentiation:

• To ensure the FCIs accurately represent financial conditions at a given time, we took steps to remove look ahead bias
• By keeping the build methodology relatively simple, we were able to construct FCIs for 6 major economies and compare their performance
• The neutral methodology does not weight variables according to previous performance in crises
• It allows all variables to contribute to financial conditions at all times, and is less vulnerable to structural change in financial systems

What does our research mean for investors?

• The FCIs will be updated regularly, and allow investors insight into the state of financial conditions at any given time
• This will also enable investors to benchmark current conditions against previous periods and compare the results with other FCIs