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Modeling Integral Financial Stability Index: A Cross-Country Study

Author

Listed:
  • Vadim Arzamasov

    (National Research University Higher School of Economics)

  • Henry Penikas

    (National Research University Higher School of Economics)

Abstract

The recent global financial crisis significantly affected world economies and revealed a problem of the clear financial stability measures absence. The construction of an integral index is highly desirable to track the financial stability level over time and diminish the probability of financial instability through the recognition of its sources. The novelty of the current research is that such an index is being built for various countries at the same time and the quantitative measures are being introduced to select the best model by comparing the behavior of different models with the benchmark. It was shown that data non-stationarity plays a significant role in the best predictors’ selection. Therefore, the best model is that built on the first differences of initial indicators. The best model contains “Return on Assets” and “Regulatory Capital to Risk-Weighted Assets” as financial stability predictors.

Suggested Citation

  • Vadim Arzamasov & Henry Penikas, 2014. "Modeling Integral Financial Stability Index: A Cross-Country Study," HSE Working papers WP BRP 75/EC/2014, National Research University Higher School of Economics.
    • Handle: RePEc:hig:wpaper:75/ec/2014
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    File URL: http://www.hse.ru/data/2014/11/25/1101707271/75EC2014.pdf
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    References listed on IDEAS

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    1. Blaise Gadanecz & Kaushik Jayaram, 2009. "Measures of financial stability - a review," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Measuring financial innovation and its impact", Basel, 26-27 August 2008, volume 31, pages 365-380, Bank for International Settlements.
    2. Scott Brave & R. Andrew Butters, 2011. "Monitoring financial stability: a financial conditions index approach," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 35(Q I), pages 22-43.
    3. Armida San Jose & Russell Krueger & Phousnith Khay, 2008. "The IMF's work on financial soundness indicators," IFC Bulletins chapters, in: Bank for International Settlements (ed.), The IFC's contribution to the 56th ISI Session, Lisbon, August 2007, volume 28, pages 33-39, Bank for International Settlements.
    4. Goodhart,Charles, 2011. "The Basel Committee on Banking Supervision," Cambridge Books, Cambridge University Press, number 9781107007239.
    5. Jaume Puig & Mr. Ken Miyajima & Rebecca McCaughrin & Mr. Peter Dattels, 2010. "Can You Map Global Financial Stability?," IMF Working Papers 2010/145, International Monetary Fund.
    6. Miguel Morales & Dairo Estrada, 2010. "A financial stability index for Colombia," Annals of Finance, Springer, vol. 6(4), pages 555-581, October.
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    Cited by:

    1. Marina Yu. Malkina & Rodion V. Balakin, 2023. "The Relation of Financial and Industrial Stresses to Monetary Policy Parameters in the Russian Economy," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 3, pages 104-121, June.

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    More about this item

    Keywords

    financial stability; integral index; economic resilience; IMD; early warning system;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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