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A methodology for constructing a financial systemic stress index: An application to Greece

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  • Louzis, Dimitrios P.
  • Vouldis, Angelos T.

Abstract

The paper develops a financial systemic stress index (FSSI) for Greece. We present a novel methodology for constructing and evaluating a systemic stress index which i) adopts the suggestion of Hollo et al. (2012) [“CISS — A ‘Composite Indicator of Systemic Stress’ in the Financial System” ECB working paper] to incorporate time-varying correlations between different market segments, but uses a multivariate GARCH approach which is able to capture abrupt changes in correlations, shown to be a prerequisite for correctly identifying financial crises, ii) utilizes both market and balance sheet data which is a novel feature for systemic stress indicators and iii) evaluates the FSSI utilizing the results of a survey, conducted among financial experts, in order to construct a benchmark chronology of financial crises for Greece, which in turn is used to investigate whether changes in the FSSI are good leading indicators for financial crises. The results show that the FSSI is able to provide a precise periodization of crises. Our findings suggest that accurate depiction of the systematic nature of stress is pivotal in order to provide proper policy guidance with respect to financial crisis identification.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 29 (2012)
Issue (Month): 4 ()
Pages: 1228-1241

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Handle: RePEc:eee:ecmode:v:29:y:2012:i:4:p:1228-1241

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Financial crisis; Systemic stress; Stress index; Multivariate GARCH;

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Cited by:
  1. Caraiani, Petre, 2014. "The predictive power of singular value decomposition entropy for stock market dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 393(C), pages 571-578.
  2. Dimitrios P. Louzis, 2013. "Measuring return and volatility spillovers in euro area financial markets," Working Papers 154, Bank of Greece.
  3. Liao, Jui-Jung & Shih, Ching-Hui & Chen, Tai-Feng & Hsu, Ming-Fu, 2014. "An ensemble-based model for two-class imbalanced financial problem," Economic Modelling, Elsevier, vol. 37(C), pages 175-183.
  4. Wilmar Cabrera & Jorge Hurtado & Miguel Morales & Juan Sebastián Rojas, 2014. "A Composite Indicator of Systemic Stress (CISS) for Colombia," BORRADORES DE ECONOMIA 011697, BANCO DE LA REPÚBLICA.
  5. Dimitris P. Louzis, 2014. "Macroeconomic and credit forecasts in a small economy during crisis: A large Bayesian VAR approach," Working Papers 184, Bank of Greece.

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