How Many Factors and Shocks Cause Financial Stress?

27 Pages Posted: 26 Nov 2013

See all articles by Marcus Kappler

Marcus Kappler

Center for European Economic Research (ZEW)

Frauke Schleer

ZEW – Leibniz Centre for European Economic Research

Date Written: November 15, 2013

Abstract

The aim of this paper is to assess the dimension of factors and shocks that drive financial conditions, and in particular financial stress in the euro area. A second aim is to construct summary indices on the conditions and level of stress in financial markets with the aid of a dynamic factor model. By analysing 149 newly compiled monthly time series on financial market conditions in the euro area, our results suggest that the data respond quite differently to fundamental shocks to financial markets but the dimension of these shocks is rather limited. Consequently, countries or segments of the financial sector in the euro area react fairly heterogonously to such shocks. We estimate several common factors and by means of an exploratory analysis we give them an economic interpretation. We find that the existence of a "Periphery Banking Crisis" factor, a "Stress" factor and a "Yield Curve" factor explains the bulk of variation in recent euro area financial sector data.

Keywords: Financial Stress, Dynamic Factor Models, Financial Crisis, Euro Area

JEL Classification: C38, G01

Suggested Citation

Kappler, Marcus and Schleer, Frauke, How Many Factors and Shocks Cause Financial Stress? (November 15, 2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-100, Available at SSRN: https://ssrn.com/abstract=2359361 or http://dx.doi.org/10.2139/ssrn.2359361

Marcus Kappler (Contact Author)

Center for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1 D-68161 Mannheim
Germany
+49 621 1235 157 (Phone)
+49 621 1235 223 (Fax)

Frauke Schleer

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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