Regime-Switching Measure of Systemic Financial Stress
16 Pages Posted: 15 Dec 2011
Date Written: June 6, 2011
Abstract
In this paper, abrupt and large changes in volatility of financial variables representing dynamics of the US financial sector are modeled with a joint regime-switching process, distinguishing "low" and "high" volatility regimes. I find that the joint "high" volatility regime for the TED spread, return on the NYSE index, and capital-weighted CDS spread for large banks is closely related to periods of financial stress. This result suggests that the probability of the joint high volatility regime of these financial variables can be considered as a measure of systemic financial stress.
The views expressed in this paper are solely my own and do not necessarily refect the position of the Federal Reserve Bank of Richmond or the Federal Reserve System.
Keywords: Financial stress, Systemic risk, Regime-switching process, SWARCH
JEL Classification: C32, G01, G12
Suggested Citation: Suggested Citation
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