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A financial stress index for the United Kingdom

Author

Listed:
  • Chatterjee, Somnath

    (Bank of England)

  • Chiu, Jeremy

    (Bank of England)

  • Hacioglu-Hoke, Sinem

    (Bank of England)

  • Duprey, Thibaut

    (Bank of Canada)

Abstract

In this paper we develop an index to monitor the intensity of financial stress in the UK over a period of 45 years. By aggregating various market-based indicators of financial stress from six major markets, we allow each indicator to be assessed in terms of its systemic importance. This enables the index to capture the interconnectedness of financial markets. The index successfully captures three episodes of heightened stress in UK financial history. We also attempt to determine how much a financial shock to the UK economy is amplified in a period of stress vis-à-vis a tranquil period. It involves exploring the dynamic relationship of the index with the UK real economy by two specifications of threshold vector auto-regression models. We find empirical evidence for the existence of feedback loops in the shock propagation between the real and the financial sector in the United Kingdom.

Suggested Citation

  • Chatterjee, Somnath & Chiu, Jeremy & Hacioglu-Hoke, Sinem & Duprey, Thibaut, 2017. "A financial stress index for the United Kingdom," Bank of England working papers 697, Bank of England.
    • Handle: RePEc:boe:boeewp:0697
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2017/a-financial-stress-index-for-the-united-kingdom.pdf?la=en&hash=D4B2767A56E17029181C8D9481AAB6DF74605AD8
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    Citations

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    Cited by:

    1. Vladyslav Filatov, 2020. "A New Financial Stress Index for Ukraine," IHEID Working Papers 15-2020, Economics Section, The Graduate Institute of International Studies.
    2. Theshne Kisten, 2019. "A financial stress index for South Africa: A time-varying correlation approach," Working Papers 805, Economic Research Southern Africa.
    3. Duprey, Thibaut & Klaus, Benjamin, 2022. "Early warning or too late? A (pseudo-)real-time identification of leading indicators of financial stress," Journal of Banking & Finance, Elsevier, vol. 138(C).
    4. Mehmet Balcilar & Rangan Gupta & Theshne Kisten, 2020. "The Impact of Uncertainty Shocks in South Africa: The Role of Financial Regimes," Working Papers 202046, University of Pretoria, Department of Economics.
    5. Thibaut Duprey, 2018. "Asymmetric Risks to the Economic Outlook Arising from Financial System Vulnerabilities," Staff Analytical Notes 2018-6, Bank of Canada.
    6. Thibaut Duprey, 2020. "Canadian Financial Stress and Macroeconomic Condition," Canadian Public Policy, University of Toronto Press, vol. 46(S3), pages 236-260, October.
    7. Andrea Cipollini & Ieva Mikaliunaite, 2021. "Financial distress and real economic activity in Lithuania: a Granger causality test based on mixed-frequency VAR," Empirical Economics, Springer, vol. 61(2), pages 855-881, August.
    8. DEHMEJ , Salim & MIKOU, Mohammed, 2020. "Indice agrégé de stabilité financière au Maroc," Document de travail 2020-2, Bank Al-Maghrib, Département de la Recherche.

    More about this item

    Keywords

    Financial stress index; AUROC; GARCH; threshold VAR;
    All these keywords.

    JEL classification:

    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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