Liquidity indicator for the Croatian economy – Factor analysis approach

Abstract

Croatian business surveys (BS) are conducted in the manufacturing industry, retail trade and construction sector. In all of these sectors, manager´s assessments of liquidity are measured. The aim of the paper was to form a new composite liquidity indicator by including business survey liquidity measures from all three covered economic sectors in the Croatian economy mentioned above. In calculating the leading indicator, a factor analysis approach was used. However, this kind of indicator does not exist in a Croatia or in any other European economy. Furthermore, the issue of Croatian companies´ illiquidity is highly neglected in the literature. The empirical analysis consists of two parts. In the first part the new liquidity indicator was formed using factor analysis. One factor (representing the new liquidity indicator; LI) was extracted out of the three liquidity variables in three economic sectors. This factor represents the new liquidity indicator. In the second part, econometric models were applied in order to investigate the forecasting properties of the new business survey liquidity indicator, when predicting the direction of changes in Croatian industrial production. The quarterly data used in the research covered the period from January 2000 to April 2013. Based on econometric analysis, it can be concluded that the LI is a leading indicator of Croatia’s industrial production with better forecasting properties then the standard liquidity indicators (formed in a manufacturing industry).

Keywords

• Leading indicator
• Liquidity measure
• Factor analysis