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Searching for a Metric for Financial Stability

Author

Listed:
  • Lea Zicchino
  • Dimitrios Tsomocos

    ()

  • Miguel Segoviano

    ()

  • Charles Goodhart

    ()

  • Oriol Aspachs Bracon

    ()

Abstract

We propose a metric of financial stability that is a weighted average of the probability of default and the equity of each country. The weights are obtained in the VAR and must reflect that the welfare changes due to financial instability are produced primarily through changes of the probability of default and secondarily through changes of the equity value. The metric is based on the definition of financial instability suggested by Tsomocos (2003 a and b) and Goodhart, Sunirand and Tsomocos (2006).
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Suggested Citation

  • Lea Zicchino & Dimitrios Tsomocos & Miguel Segoviano & Charles Goodhart & Oriol Aspachs Bracon, 2006. "Searching for a Metric for Financial Stability," FMG Special Papers sp167, Financial Markets Group.
  • Handle: RePEc:fmg:fmgsps:sp167
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    File URL: http://www.lse.ac.uk/fmg/documents/specialPapers/2006/sp167.pdf
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    References listed on IDEAS

    as
    1. Alchian, Armen A & Klein, Benjamin, 1973. "On a Correct Measure of Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 173-191, Part I Fe.
    2. Murphy, Antoin E, 1978. "Money in an Economy without Banks: The Case of Ireland," The Manchester School of Economic & Social Studies, University of Manchester, vol. 46(1), pages 41-50, March.
    3. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
    4. Mishkin, Frederic S, 1992. "Anatomy of a Financial Crisis," Journal of Evolutionary Economics, Springer, vol. 2(2), pages 115-130, August.
    5. Fan, Wei & White, Michelle J, 2003. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 543-567, October.
    6. Demsetz, Harold, 1969. "Information and Efficiency: Another Viewpoint," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 1-22, April.
    7. Garry J. Schinasi, 2003. "Responsibility of Central Banks for Stability in Financial Markets," IMF Working Papers 03/121, International Monetary Fund.
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    Citations

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    Cited by:

    1. Miguel Ángel Morales Mosquera, "undated". "Concentración y estabilidad financiero: el caso del sistema bancario colombiano," Temas de Estabilidad Financiera 058, Banco de la Republica de Colombia.
    2. 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.
    3. International Monetary Fund, 2009. "Cyprus; Financial Sector Assessment Program Update: Technical Note: Measuring Banking Stability in Cyprus," IMF Staff Country Reports 09/171, International Monetary Fund.
    4. Dairo Estrada & Miguel Ángel Morales Mosquera, "undated". "Indice de Estabilidad Financiera para Colombia," Temas de Estabilidad Financiera 038, Banco de la Republica de Colombia.
    5. Goodhart, C.A.E. & Sunirand, P. & Tsomocos, D.P., 2011. "The optimal monetary instrument for prudential purposes," Journal of Financial Stability, Elsevier, vol. 7(2), pages 70-77, June.
    6. Mario Pecaric & Josip Viskovic, 2013. "The effects of prudential policy measures on financial stability in post-transition countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 31(1), pages 9-34.
    7. Jan Willem van den End, 2010. "Liquidity Stress-Tester: A Model for Stress-testing Banks' Liquidity Risk," CESifo Economic Studies, CESifo, vol. 56(1), pages 38-69, March.
    8. C. A. E. Goodhart & Miguel A. Segoviano Basurto, 2009. "Banking Stability Measures," IMF Working Papers 09/4, International Monetary Fund.
    9. Eric Wong & Cho-Hoi Hui, 2009. "A Liquidity Risk Stress-Testing Framework with Interaction between Market and Credit Risks," Working Papers 0906, Hong Kong Monetary Authority.
    10. Apostolakis, George & Papadopoulos, Athanasios P., 2015. "Financial stress spillovers across the banking, securities and foreign exchange markets," Journal of Financial Stability, Elsevier, vol. 19(C), pages 1-21.
    11. Miguel Morales & Dairo Estrada, 2010. "A financial stability index for Colombia," Annals of Finance, Springer, vol. 6(4), pages 555-581, October.
    12. Santiago Caicedo & Dairo Estrada & Mariana Laverde, "undated". "Countercyclical banking capital bu ers in a DSGE model," Temas de Estabilidad Financiera 071, Banco de la Republica de Colombia.
    13. Mark Swinburne & Stéphanie Marie Stolz & Marina Moretti, 2008. "Stress Testing at the IMF," IMF Working Papers 08/206, International Monetary Fund.
    14. Jaume Puig & Ken Miyajima & Rebecca McCaughrin & Peter Dattels, 2010. "Can You Map Global Financial Stability?," IMF Working Papers 10/145, International Monetary Fund.

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