CISS - a composite indicator of systemic stress in the financial system
AbstractThis paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. Weekly updates of the CISS dataset at: sdw.ecb.europa.eu/browseSelection.do?node=9551138 JEL Classification: G01, G10, G20, E44
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 1426.
Date of creation: Mar 2012
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Find related papers by JEL classification:
- G01 - Financial Economics - - General - - - Financial Crises
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-08 (All new papers)
- NEP-BAN-2012-07-08 (Banking)
- NEP-CBA-2012-07-08 (Central Banking)
- NEP-EEC-2012-07-08 (European Economics)
- NEP-RMG-2012-07-08 (Risk Management)
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