Dating systemic financial stress episodes in the EU countries
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Connects with: @cardarelli2011 @hakkio2009 @hollo2012 @illing2006
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duprey2017 - p. 31
The model-based approach outlined in this paper consists of two main steps that are subsequently described in more detail: (i) constructing a simple country-level index of financial stress (CLIFS), and (ii) identifying systemic financial stress episodes which are periods of elevated financial market stress with “systemic” characteristics.
duprey2017 - p. 32
For 27 out of the 28 EU countries, we construct a monthly coincident measure of financial stress covering up to 52 years from February 1964 to December 2016.11 By doing so, we pay particular attention to ensure (i) cross-country comparability, and (ii) a sufficiently long time span to cover as many financial stress events as possible.
duprey2017 - p. 32
Financial stress is defined as simultaneous financial market turmoil across a wide range of assets. It is reflected by (i) the uncertainty in market prices, (ii) sharp corrections in market prices, and (iii) the degree of commonality across asset classes
duprey2017 - p. 33
To maximize the country and time span coverage, our benchmark CLIFS includes data capturing three financial market segments: (i) equity markets: stock price index (STX), (ii) bond markets: 10-year government yields (R10), and (iii) foreign exchange markets: real effective exchange rate (rEER) computed as the geometric average of bilateral exchange rates weighted by bilateral trade volumes.
duprey2017 - p. 34
Similar to Hollo et al. (2012), we aggregate the sub-indices for the three financial market segments based on a portfolio theory approach that weights each sub-index by its cross-correlation with the others.23