A Financial Stress Index for the United Kingdom

Abstract

In this paper we develop an index to monitor the intensity of financial stress in the UK over a period of 45 years. By aggregating various market-based indicators of financial stress from six major markets, we allow each indicator to be assessed in terms of its systemic importance. This enables the index to capture the interconnectedness of financial markets. The index successfully captures three episodes of heightened stress in UK financial history. We also attempt to determine how much a financial shock to the UK economy is amplified in a period of stress vis-à-vis a tranquil period. It involves exploring the dynamic relationship of the index with the UK real economy by two specifications of threshold vector auto-regression models. We find empirical evidence for the existence of feedback loops in the shock propagation between the real and the financial sector in the United Kingdom.

Making Text Count: Economic Forecasting Using Newspaper Text

“…Our forecasting targets are GDP, the unemployment rate, business investment, household consumption, consumer price inflation (CPI), the index of production (IOP), the index of services (IOS), the financial stress index of Chatterjee et al (2017), and the IMF financial conditions index for the UK. All variables are at monthly frequency, with the exception of investment and consumption, which are quarterly, and are up-sampled using interpolation through time from in-sample data points only.…”

Canadian Financial Stress and Macroeconomic Condition

“…In the context of a Bayesian TVAR, monetary policy has a more severe impact on output when financial conditions are tighter (see, for the United States, Balke 2000 ; for Canada, Li and St-Amant 2010). For the United Kingdom, Chatterjee et al (2017 ) find support for a feedback loop between real and financial stress. Another strategy relies on a Markov-switching vector autoregressive model (VAR) in which the change in regime is driven by an unob served Markov chain rather than an observable measure of financial stress, as in the Bayesian TVAR.…”

“…Once a financial stress composite has been successfully built, its ability to contemporaneously signal known stress events should be back-tested. Simple measures of financial stress such as Duprey et al's (2017 ) Country-Level Index of Financial Stress (CLIFS) capture almost all of the known crises in Europe but also react to additional stress events that were deemed not stressful enough to unfold into a full-fledged crisis. To ensure the financial stress compos ite is a fair representation of the sequence of financial crises, the aggregation technique could be optimized to capture a limited list of expert-identified events.…”

“…To ensure the financial stress compos ite is a fair representation of the sequence of financial crises, the aggregation technique could be optimized to capture a limited list of expert-identified events. To that extent, Chatterjee et al (2017 ) suggest using information weights to avoid redundant data and discount those that do not match the narrative of financial stress events. Unfortunately, these tools are of limited use in Canada, a country that, according to Laeven and Valencia (2013 ), never experienced a systemic banking crisis because its fi nancial system was much more resilient to the 2008 global financial crisis (Huang and Ratnovski 2009).…”

The impact of uncertainty shocks in South Africa: The role of financial regimes

“…2020) examines the relative importance of the exchange rate, trade and financial channel in the transmission of US uncertainty shocks on the dynamics of a panel of advanced economies and emerging market economies, and finds that in both cases the financial channel plays the most prominent role in the transmission mechanism. 3 Aboura & van Roye (2017), Balcilar et al (2016), Chatterjee et al (2017), Hollo et al (2012, Hubrich & Tetlow (2015), and van Roye (2014), have documented differing economic dynamics during stressful and normal times in the financial system, however, specifically examining the impact of financial shocks. 4 The industrial production index covers real output in the manufacturing sector only.…”