Financial Risk Meter for The Romanian Stock Market

Daniel Traian Pele (), Alexandra Ioana Conda, Raul Cristian Bag, Miruna Mazurencu-Marinescu-Pele and Vasile Alecsandru Strat
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Daniel Traian Pele: Department of Statistics and Econometrics, Faculty of Cybernetics, Statistics and Economic Informatics, The Bucharest University of Economic Studies, Piata Romana nr. 6, sector 1, 010374, Bucharest, Romania. Institute for Economic Forecasting, Romanian Academy; Casa Academiei, Calea 13 Septembrie nr. 13, sector 5, 050711, Bucharest, Romania.
Alexandra Ioana Conda: Economic Cybernetics and Statistics Doctoral School, Faculty of Economic Cybernetics, Statistics and Informatics, Bucharest University of Economic Studies, Piata Romana nr. 6, sector 1, 010374, Bucharest, Romania
Raul Cristian Bag: Economic Cybernetics and Statistics Doctoral School, Faculty of Economic Cybernetics, Statistics and Informatics, Bucharest University of Economic Studies, Piata Romana nr. 6, sector 1, 010374, Bucharest, Romania
Miruna Mazurencu-Marinescu-Pele: Department of Statistics and Econometrics, Faculty of Cybernetics, Statistics and Economic Informatics, The Bucharest University of Economic Studies, Piata Romana nr. 6, sector 1, 010374, Bucharest, Romania.
Vasile Alecsandru Strat: Department of Statistics and Econometrics, Faculty of Cybernetics, Statistics and Economic Informatics, The Bucharest University of Economic Studies, Piata Romana nr. 6, sector 1, 010374, Bucharest, Romania.

Journal for Economic Forecasting, 2023, issue 1, 5-24

Abstract: This article aims to estimate the systemic risk of the Romanian stock market, using the FRM (Financial Risk Meter) methodology. This research contribution is about applying a novel systemic risk index to the Romanian financial system (FRM@RO), to identify potential sources of systemic risk, and to understand network interconnections, thus increasing risk awareness of both managers and regulators. By using data for companies listed at the Bucharest Stock Exchange (BSE), our article highlights several aspects of the systemic risk of the Romanian stock market. First, our study reveals that the main driver of systemic risk, especially during financial crises, is the volatility index, VIX. However, local factors, such as ROBOR interest rate and sectorial indices for financial investment companies, in general, and energy sector companies, in particular, are extremely important in triggering systemic risk. Second, the system risk indicator for the Romanian stock market, FRM@RO, may capture both investor sentiment, measured via the Google Trends Search Volume Index, and stock market volatility. Third, FRM@RO can act as an early warning indicator for economic turmoil, being able to predict periods of technical recession one quarter in advance. Fourth, by using network analysis, we can identify, daily, the level of market interconnectedness and highlight the main companies triggering tail co-movements. Fifth, we emphasize the need for an integrated early warning system for financial crises.

Keywords: systemic risk; spillover effect; Romania; FRM@RO; financial risk meter (search for similar items in EconPapers)
JEL-codes: C11 C3 E44 (search for similar items in EconPapers)
Date: 2023
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