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FISS - A Factor-based Index of Systemic Stress in the Financial System

Author

Listed:
  • Tibor Szendrei

    (Central Bank of Hungary; Heriot-Watt University)

  • Katalin Varga

    (Central Bank of Hungary)

Abstract

Tracking and monitoring stress within the financial system is a key component of macroprudential policy. This paper introduces a new measure of contemporaneous stress: the Factor-based Index of Systemic Stress (FISS). The aim of the index is to capture the common components of data describing the financial system. This new index is calculated with a dynamic Bayesian factor model methodology, which compresses the available high frequency and high dimensional dataset into stochastic trends. Aggregating the extracted four factors into a single index is possible in a multitude of ways, but averaging yields satisfactory results. The contribution of this paper is the usage of the dynamic Bayesian framework to measure financial stress, as well as producing the measure in a timely manner without the need for deep option markets. Applied to Hungarian data the FISS is a key element of the macroprudential toolkit.

Suggested Citation

  • Tibor Szendrei & Katalin Varga, 2020. "FISS - A Factor-based Index of Systemic Stress in the Financial System," Russian Journal of Money and Finance, Bank of Russia, vol. 79(1), pages 3-34, March.
    • Handle: RePEc:bkr:journl:v:79:y:2020:i:1:p:3-34
    DOI: 10.31477/rjmf.202001.03
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    More about this item

    Keywords

    systemic stress; financial stress index; Dynamic Bayesian Factor Model; financial system; macroprudential toolkit;
    All these keywords.

    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

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