Financial Stress Index: A Lens for Supervising the Financial System

Abstract

This paper develops a new financial stress measure (Cleveland Financial Stress Index, CFSI) that considers the supervisory objective of identifying risks to the stability of the financial system. The index provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The construction methodology uses daily public market data collected from different sectors of financial markets. A unique feature of the index is that it employs a dynamic weighting method that captures the changing relative importance of the different sectors of the financial system. This study shows how the index can be applied to monitoring and analyzing financial system conditions.

Keywords: financial system stability, systemic risk, financial stress, financial supervision, financial stress index

JEL Classification: G01, G10, C22, C52, E32, E44, E66