Clustering macroeconomic variables to identify economic regimes

Core macroeconomic variables

1. Yield curve

2. Inflation

3. ​Equity Valuation

4. Payout ratios

5. Leading economic indicators

6. Equity volatility

I have been thinking about this in the following steps:

1. Use PCA to prioritize independent/explanatory variables

2. then figure out the clustering technique suited to the task and the combination of dependent and independent variables

3. then setup the distance metric: I like Mahalanobis distance more than Euclidean as it can address multi-collinearity a little better

4. and then run it through 2 or more clustering for stabilization/validation

Methodologies for Clustering Macro Variables & Identifying Economic Regimes​

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