A methodology for constructing a financial systemic stress index: An application to Greece

Dimitrios Louzis and Angelos Vouldis

Economic Modelling, 2012, vol. 29, issue 4, 1228-1241

Abstract: The paper develops a financial systemic stress index (FSSI) for Greece. We present a novel methodology for constructing and evaluating a systemic stress index which i) adopts the suggestion of Hollo et al. (2012) [“CISS — A ‘Composite Indicator of Systemic Stress’ in the Financial System” ECB working paper] to incorporate time-varying correlations between different market segments, but uses a multivariate GARCH approach which is able to capture abrupt changes in correlations, shown to be a prerequisite for correctly identifying financial crises, ii) utilizes both market and balance sheet data which is a novel feature for systemic stress indicators and iii) evaluates the FSSI utilizing the results of a survey, conducted among financial experts, in order to construct a benchmark chronology of financial crises for Greece, which in turn is used to investigate whether changes in the FSSI are good leading indicators for financial crises. The results show that the FSSI is able to provide a precise periodization of crises. Our findings suggest that accurate depiction of the systematic nature of stress is pivotal in order to provide proper policy guidance with respect to financial crisis identification.

Keywords: Financial crisis; Systemic stress; Stress index; Multivariate GARCH (search for similar items in EconPapers)
JEL-codes: E44 G01 G10 G20 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:4:p:1228-1241

DOI: 10.1016/j.econmod.2012.03.017

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