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Near-Coincident Indicators of Systemic Stress

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  • Ivailo Arsov
  • Elie Canetti
  • Laura E. Kodres
  • Srobona Mitra
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    Abstract

    The G-20 Data Gaps Initiative has called for the IMF to develop standard measures of tail risk, which we identify in this paper with systemic risk. To understand the conditions under which tail risk is present, it is first necessary to develop a measure of what constitutes a systemic stress, or tail, event. We develop such a measure and uses it to assess the performance of eleven near-term systemic risk indicators as ‘early’ warning of distress among top financial institutions in the United States and the euro area. Two indicators perform particularly well in both regions, and a couple of other simple indicators do well across a number of criteria. We also find that the sizes of institutions do not necessarily correspond with their contribution to spillover risk. Some practical guidance for policies is provided.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/115.

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    Length: 33
    Date of creation: 17 May 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/115

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    Related research

    Keywords: International financial system; Financial institutions; Financial risk; Risk management; Coincident Indicator; Early Warning; Financial Stress; Systemic Risk; Tail Risk; financial crises; financial stability; equity market; financial crisis; systemic crisis; money market; banking crises; global financial crisis; international financial markets; crisis episode; recessions; derivative; government bond; treasury bonds; financial services; bond yields; financial instruments; early warning systems; recapitalization; stock market; equity markets; equity derivatives; government bond yields; crisis management; financial sector;

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    1. Diebold, Francis X. & Yilmaz, Kamil, 2008. "Measuring financial asset return and volatilty spillovers, with application to global equity markets," CFS Working Paper Series 2008/26, Center for Financial Studies (CFS).
    2. International Monetary Fund, 2009. "How to Stop a Herd of Running Bears? Market Response to Policy Initiatives During the Global Financial Crisis," IMF Working Papers 09/204, International Monetary Fund.
    3. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 115(505), pages 722-744, 07.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
    5. Schwaab, Bernd & Koopman, Siem Jan & Lucas, André, 2011. "Systemic risk diagnostics: coincident indicators and early warning signals," Working Paper Series, European Central Bank 1327, European Central Bank.
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    Cited by:
    1. Judith Eidenberger & Benjamin Neudorfer & Michael Sigmund & Ingrid Stein, 2013. "Quantifying Financial Stability in Austria, New Tools for Macroprudential Supervision," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 26, pages 62-81.

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