I am trying to construct a financial stress index. I have selected 12 variables that I use as indicators of financial market stress. These are all time series of daily data (VIX, credit spreads, etc.). I am trying to use principal component analysis (PCA) to decide on the weights these variables should get in my index. I am using Stata. If I run the
pca command I get 12 components with eigenvalues. I then select only the components that have eigenvalue > 1 (Kaiser rule) and now I'm left with 3 components.
pca $varlist, mineigen(1) estat loadings predict pc1 pc2 pc3, score
I now have 3 time series
pc1, pc2, pc3 which are, if I understand correctly, the first three principal components.
I don't understand how I create an index out of a combination of these 3 components. What is the logical step to take now and how should I interpret the different factor loadings of the different variables in the different components?
Main question: what steps should I take to derive a time series of my financial stress index?
If you need any additional info to answer my question please say so and I'll try my best to make it as clear as possible.