Tomas' Financial Conditions Z Score

ayer

"The indicator is a composite z-score comprised of the following four components (equally-weighted):

Credit spreads - ICE BofA High Yield Option Adjusted Spread (BAMLH0A0HYM2) and ICE BofA Corporate Index Option Adjusted Spread (BAMLC0A0CM)

Volatility indexes - VIX (S&P 500 implied volatility) and MOVE (US Treasury bond implied volatility)

I've got it set to a 160-day lookback period, which I think is roughly the best setting after some tinkering.

When the z-score is above zero, it throws a red signal - and when the z-score is below zero, it throws a green signal.

This indicator is a follow-on from the "traffic light financial conditions indicator" that I wrote a thread about a couple of months ago.

I moved on from that previous indicator because it is based on the Federal Reserve's NFCI, which is regularly revised, but I didn't take that into account at the time.

So not a great real-time indicator, if the signal can be subsequently revised in the opposite direction weeks later.

This new indicator is based on real-time market data, so there's no revisions, and it also updates daily, as opposed to weekly for the NFCI"