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A Measure of Downside Risk in Multivariate Setup with Application in Measuring Financial Stress

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  • Sneharthi Gayen

    (Reserve Bank of India (RBI))

Abstract

Financial Stress Indicator (FSI) combines indicators from different segments of the financial market into a unified measure, which indicates the current degree of stress in the financial system. Existing methods for combining various indicators/ variables have some limitations - either correlation between the variables is not factored or sometimes interpretation of their coefficients becomes difficult. We propose an alternative method for FSI by developing a multivariate downside risk measure that combines the concepts of multivariate distance and semivariance. We compare performance of this method alongside the existing methods by applying them to United States and Indian data and find that the proposed method is able to identify financial stress in these markets reasonably well.

Suggested Citation

  • Sneharthi Gayen, 2016. "A Measure of Downside Risk in Multivariate Setup with Application in Measuring Financial Stress," Sankhya B: The Indian Journal of Statistics, Springer;Indian Statistical Institute, vol. 78(2), pages 287-315, November.
    • Handle: RePEc:spr:sankhb:v:78:y:2016:i:2:d:10.1007_s13571-016-0117-7
    DOI: 10.1007/s13571-016-0117-7
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    References listed on IDEAS

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    1. 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.
    2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    3. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-126, March.
    4. Kevin L. Kliesen & Douglas C. Smith, 2010. "Measuring financial market stress," Economic Synopses, Federal Reserve Bank of St. Louis.
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