The OFR Financial Stress Index

Thoughts

Financial stress doesn’t have a common definition, while some authors define it as a materialization of a systemic risk or the product of the interaction between vulnerabilities. The broad definition suggested here is that financial stress is the disruption to the normal functioning of financial markets. It involves at least one of these:

Increased asymmetry of information
Increased uncertainty about the fundamental value of assets or the behavior of investors
Decreased willingness to hold risky or illiquid assets

A financial stress index (FSI) is a univariate timeseries that aggregates information from a set of indicators that measure the severity and nature of stress as it occurs. It informs what is the state of the financial system. Although related, it doesn’t measure economic vulnerability. Previously used indicators include measures of volatility, credit spreads, funding spreads, and interest rates.

The OFR FSI is daily snapshot of systemic financial stress across the globe, based on more than 30 contemporary and historical indicators. It uses dynamic weighting scheme to change the contribution of each indicator on the basis of its importance to market participants. In this index, the indicators have different categories: credit spreads (e.g. BaML US Corporate Master), equity valuation (e.g. NIKKEI 225 Index), Funding (e.g. 3-month EURIBOR-EONIA), and safe assets (e.g. Gold/USD Real Spot Exchange Rate). The OFR FSI scale proved to be able to coincide with major historical financial crisis across the globe since 2000.

Connects with: @cardarelli2011 @hakkio2009 @hollo2012 @illing2006

Annotations

Previous theory and evidence

monin2019 - p. 1

FSI measures the severity and nature of stress as it occurs. Vulnerabilities can build during periods of low stress

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monin2019 - p. 2

Stress and vulnerabilities should therefore be measured separately.

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monin2019 - p. 3

Some researchers define financial stress as being directly related to financial market functioning (Carlson et al. 2012; Sandahl et al. 2011). Others define stress indirectly as “systemic risk which has materialized” (Louzis and Vouldis 2013) or as the product of the interactions between vulnerabilities in markets and shocks (Grimaldi 2010, 2011).

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monin2019 - p. 3

this motivates the following definition: financial stress refers to disruptions to the normal functioning of financial markets

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monin2019 - p. 3

financial stress is characterized by the coincident manifestation of one or more of the following

Note:

Increased uncertainty about the fundamental value of assets or the behavior of investors- Increased asymmetry of information

Decreased willingness to hold risky assets

Decreased willingness to hold illiquid assets Annotated on: 2025-05-26

monin2019 - p. 4

A financial stress index is a univariate time series that aggregates the information in these indicators and isolates and measures the level of financial stress

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monin2019 - p. 4

FSIs are concerned with distress or instability in the financial system without explicit regard for how such distress may manifest in the real economy.

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monin2019 - p. 4

constructed FSIs to examine the relationship between financial stress and macroeconomic variables (Apostolakis and Papadopoulos 2019) or exchange rates (Adam et al. 2018)

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monin2019 - p. 5

Common types of indicators included are measures of volatility, credit spreads, funding spreads, and interest rates

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monin2019 - p. 5

The post-crisis environment has also been fertile ground for development of systemic risk indicators, or SRIs. SRIs measure vulnerabilities rather than stress.

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monin2019 - p. 5

an FSI indicates what the state of the financial system is, and an SRI expresses what happens if the state of the financial system contains a specific stress event

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monin2019 - p. 15

One of the motivations in measuring financial stress is that it can have adverse real economic effects.

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monin2019 - p. 15

Financial stress, as measured by other FSIs, can forecast declines in economic activity

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New evidence from the article

monin2019 - p. 17

The OFR FSI is an entry point for financial market monitoring, not a sufficient statistic for understanding financial markets or financial stress events. It is a coincident indicator of stress in the financial system, not necessarily a leading indicator or predictor of financial stress events.

Annotated on: 2025-05-26

Characteristics from the article

monin2019 - p. 1

The OFR FSI is a daily, market-based snapshot of systemic financial stress in global financial markets available to policymakers at the Financial Stability Oversight Council, its member agencies, the financial industry, Congress, and the public. The index distills information embedded in more than 30 indicators into a summary measure of systemic financial stress. It can be decomposed into five categories of indicators or three regions, allowing users to drill down into the drivers of financial stress

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monin2019 - p. 2

OFR FSI is distinguished from other FSIs2 by its global scope, daily frequency, dynamic weighting scheme, transparent and methodical construction, and its ability to be decomposed into indicator categories and regions

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monin2019 - p. 2

OFR FSI’s value on a given day depends only on information available that day and, once estimated, its value does not change

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monin2019 - p. 2

OFR FSI’s methodology also accommodates input indicators of differing historical timespans

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monin2019 - p. 2

indicators that cease to reflect market participants’ views about financial stress can be removed and replaced

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monin2019 - p. 2

OFR FSI on a given date is proportional to the weighted average of the marginal contributions to financial stress of its constituent indicators

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monin2019 - p. 2

weights and the signs of indicators’ stress contributions are determined using a dynamic factor model with a single latent factor, which essentially corresponds to the first principal component from a principal component analysis

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monin2019 - p. 2

We define financial stress as disruptions in the typical functioning of financial markets.

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monin2019 - p. 2

Symptoms of financial stress are informed by both theory and practice, and include: uncertainty about the fundamental value of financial assets or the behavior of investors; increased asymmetric information; and a decreased willingness to hold risky or illiquid assets

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monin2019 - p. 2

over 30 global financial market indicators, such as implied volatility indexes, yield spreads, valuation measures, and interest rates that are available with varying historical timespans at a daily frequency from publicly available sources

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monin2019 - p. 2

The index is intended to capture systemic financial stress, which occurs when exogenous shocks or contagion effects occur in multiple markets simultaneously

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monin2019 - p. 3

The indicator categories are credit spreads, equity valuation, funding, safe assets, and volatility.

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monin2019 - p. 6

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monin2019 - p. 17

Annotated on: 2025-05-26

gauerle

Explorer

@monin2019

The OFR Financial Stress Index

Thoughts

Annotations

Previous theory and evidence

New evidence from the article

Characteristics from the article

Research gaps

Further reading

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