CISS - a composite indicator of systemic stress in the financial system

Manfred Kremer (), Marco Lo Duca and Dániel Holló

No 1426, Working Paper Series from European Central Bank

Abstract: This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity. Weekly updates of the CISS dataset at: sdw.ecb.europa.eu/browseSelection.do?node=9551138 JEL Classification: G01, G10, G20, E44

Keywords: Financial Stability; Financial Stress Index; financial system; macro-financial linkages; systemic risk (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-rmg
Note: 92197
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (502)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20121426

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