CISS - A Composite Indicator of Systemic Stress in the Financial System
47 Pages Posted: 19 May 2010 Last revised: 19 Aug 2015
Date Written: January 30, 2012
This paper introduces a new indicator of contemporaneous stress in the financial system named Composite Indicator of Systemic Stress (CISS). Its specific statistical design is shaped according to standard definitions of systemic risk. The main methodological innovation of the CISS is the application of basic portfolio theory to the aggregation of five market-specific subindices created from a total of 15 individual financial stress measures. The aggregation accordingly takes into account the time-varying cross-correlations between the subindices. As a result, the CISS puts relatively more weight on situations in which stress prevails in several market segments at the same time, capturing the idea that financial stress is more systemic and thus more dangerous for the economy as a whole if financial instability spreads more widely across the whole financial system. Applied to euro area data, we determine within a threshold VAR model a systemic crisis-level of the CISS at which financial stress tends to depress real economic activity.
Keywords: Financial system, Financial stability, Systemic risk, Financial stress index, Macro-financial linkages
JEL Classification: G01, G10, G20, E44
Suggested Citation: Suggested Citation