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Disentangling diverse measures: a survey of financial stress indexes

  • Kliesen, Kevin L.
  • Owyang, Michael T.
  • Vermann, E. Katarina

The recent financial crisis helped emphasize the need for measures of financial conditions. In the wake of the crisis, several researchers and institutions—both private sector and central bank—developed measures of financial stress. These measures are intended to capture, among other things, the liquidity in financial markets and potentially forecast changes in real economic conditions. Unfortunately, there is no agreement about which variables should be included in a measure of stress. The authors survey a number of financial stress indexes, comparing the datasets from which they are constructed. In principle, each of the indexes measures the same thing; thus, they should be highly correlated. The authors find that in practice, however, the correlations are high but not as high as might be expected. They also evaluate the ability of the indexes to predict future economic activity in a simple vector autoregressive forecasting model.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2012)
Issue (Month): Sep ()
Pages: 369-398

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Handle: RePEc:fip:fedlrv:y:2012:i:september:p:369-398:n:v.94no.5
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  1. Holló, Dániel & Kremer, Manfred & Lo Duca, Marco, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series 1426, European Central Bank.
  2. Louzis, Dimitrios & Vouldis, Angelos, 2013. "A financial systemic stress index for Greece," Working Paper Series 1563, European Central Bank.
  3. Stephan Danninger & Irina Tytell & Ravi Balakrishnan & Selim Elekdag, 2009. "The Transmission of Financial Stress from Advanced to Emerging Economies," IMF Working Papers 09/133, International Monetary Fund.
  4. Mikhail V. Oet & Ryan Eiben & Timothy Bianco & Dieter Gramlich & Stephen J. Ong, 2011. "The financial stress index: identification of systemic risk conditions," Working Paper 1130, Federal Reserve Bank of Cleveland.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  6. Mark A. Carlson & Kurt F. Lewis & William R. Nelson, 2012. "Using policy intervention to identify financial stress," Finance and Economics Discussion Series 2012-02, Board of Governors of the Federal Reserve System (U.S.).
  7. Elke Hanschel & Pierre Monnin, 2005. "Measuring and forecasting stress in the banking sector: evidence from Switzerland," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 431-49 Bank for International Settlements.
  8. Cardarelli, Roberto & Elekdag, Selim & Lall, Subir, 2011. "Financial stress and economic contractions," Journal of Financial Stability, Elsevier, vol. 7(2), pages 78-97, June.
  9. Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
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