A time-varying copula approach for constructing a daily financial systemic stress index

Sook Rei Tan, Changtai Li and Xiu Wei Yeap

The North American Journal of Economics and Finance, 2022, vol. 63, issue C

Abstract: This paper develops a financial systemic stress index (FSSI) for the US financial market. We propose a time-varying copula method to model the dependence structure among financial sectors in order to build a correlated financial stress model that can signal systemic financial risks. The copula method is preferable to the traditional approach, enabling the modeling of non-linear correlations. Our analyses show that the dependencies across banking, security, and forex markets are best modeled by Archimedian copulas. Finally, we conduct a Markov Switching Autoregressive (MS-AR) model for FSSI and identify high financial stress episodes taking place in 2008–2009, 2011 and 2020.

Keywords: Financial stress index; Copula; Time-varying dependence; Systemic stress; Financial crisis (search for similar items in EconPapers)
JEL-codes: C43 C58 G01 G10 G20 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:63:y:2022:i:c:s1062940822001565

DOI: 10.1016/j.najef.2022.101821

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