Introducing a novel fragility index for assessing financial stability amid asset bubble episodes

Radu Lupu, Adrian Cantemir Călin, Dan Gabriel Dumitrescu and Iulia Lupu

The North American Journal of Economics and Finance, 2025, vol. 75, issue PA

Abstract: This paper is devoted to the development of an innovative fragility index designed to capture comprehensively the dynamics of financial stability during periods characterized by asset bubbles. Utilizing a multifaceted methodological framework, the study begins by identifying bubble occurrences and calculating the delta CoVaR systemic risk metric. Building on established macroeconomic methodologies, we then propose an indicator to quantify the impact of financial bubbles on the stability of an emerging market. Specifically, we construct two coincident indicators based on daily observations of financial stability for the twenty most liquid Romanian companies. The first indicator is derived from the delta CoVaR values of these companies, while the second is computed using the residuals of a model that employs the same financial stability metric as the dependent variable, with a binary variable representing the presence of asset bubbles as the explanatory factor. This second coincident indicator tracks financial stability in the absence of bubble effects. The disparity between these two indicators forms the basis for the creation of an index, termed the “bubble fragility index,” which measures the overall susceptibility of financial stability to asset bubbles. In the context of the Romanian market, this study demonstrates that periods marked by asset bubbles are associated with elevated systemic risks. Our findings indicate that the presence of bubbles significantly intensifies financial risk factors, creating conditions conducive to severe market corrections and economic downturns. We identify specific intervals during which fragility reaches peak levels, including June to September 2018, December 2018 to March 2019, March 2020, and March 2022.

Keywords: Asset bubbles; Systemic risk; Financial stability; Financial fragility (search for similar items in EconPapers)
JEL-codes: G12 G17 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:75:y:2025:i:pa:s106294082400216x

DOI: 10.1016/j.najef.2024.102291

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