Detecting and Interpreting Financial Stress in the Euro Area

66 Pages Posted: 29 Jun 2010

See all articles by Marianna Grimaldi

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank

Date Written: June 3, 2010

Abstract

There is a need to find better models and indicators for large disruptive events, not least in order to be more prepared and mitigate their effects. In this paper we take a step in this direction and discuss the performance of a financial stress indicator with a specific focus on the euro area. As far as we know, our indicator is the first attempt to develop an indicator of financial stress with a specific focus on the euro area. It is also the first to exploit the information contained in central bank communication to help measure stress in financial markets. For use in real time, the indicator is able to efficiently extract information from an otherwise noisy signal and provide information about the level of stress in the markets.

Keywords: Financial stress, central bank communication, logit distribution, leading indicator, behavioural finance

JEL Classification: E44, E5, G1

Suggested Citation

Grimaldi, Marianna, Detecting and Interpreting Financial Stress in the Euro Area (June 3, 2010). ECB Working Paper No. 1214. Available at SSRN: https://ssrn.com/abstract=1622165

Marianna Grimaldi (Contact Author)

Monetary Policy Division Sveriges Riksbank ( email )

S-103 37 Stockholm
Sweden

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