CISS - A Composite Indicator of Systemic Stress in the Financial System

51 Pages Posted: 19 Mar 2012

See all articles by Daniel Hollo

Daniel Hollo

Magyar Nemzeti Bank

Manfred Kremer

European Central Bank (ECB)

Marco Lo Duca

European Central Bank (ECB)

Date Written: March 9, 2012

Abstract

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

Hollo, Daniel and Kremer, Manfred and Lo Duca, Marco, CISS - A Composite Indicator of Systemic Stress in the Financial System (March 9, 2012). ECB Working Paper No. 1426. Available at SSRN: https://ssrn.com/abstract=2018792

Daniel Hollo

Magyar Nemzeti Bank ( email )

1054 Szabadsag ter 8-9
H-1850 Budapest V.
Hungary

Manfred Kremer (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7065 (Phone)

Marco Lo Duca

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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