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

Abstract

Information on all of the papers published in the ECB Working Paper Series can be found on the ECB's website, http://www.ecb. europa.eu/pub/scientific/wps/date/html/index.en.html Macroprudential Research NetworkThis paper presents research conducted within the Macroprudential Research Network (MaRs). The network is composed of economists from the European System of Central Banks (ESCB), i.e. the 27 national central banks of the European Union (EU) and the European Central Bank. The objective of MaRs is to develop core conceptual frameworks, models and/or tools supporting macroprudential supervision in the EU.The research is carried out in three work streams: 1) Macro-financial models linking financial stability and the performance of the economy; 2) Early warning systems and systemic risk indicators; 3) Assessing contagion risks.MaRs is chaired by Philipp Hartmann (ECB). Paolo Angelini (Banca d'Italia), Laurent Clerc (Banque de France), Carsten Detken (ECB) and Katerina Šmídková (Czech National Bank) are workstream coordinators. Xavier Freixas (Universitat Pompeu Fabra) acts as external consultant and Angela Maddaloni (ECB) as Secretary.The refereeing process of this paper has been coordinated by a team composed of Cornelia Holthausen, Kalin Nikolov and Bernd Schwaab (all ECB).The paper is released in order to make the research of MaRs generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the ones of the author(s) and do not necessarily reflect those of the ECB or of the ESCB. ideas which helped improving the CISS. Very helpful comments from Geert Bekaert, Wolfgang Lemke, Simone Manganelli and an anonymous referee are gratefully acknowledged. We finally thank participants at the Euro Area Business Cycle Network conference "Econometric Modelling of Macro-Financial Linkages" in Florence and the 5th CSDA International Conference on Computational and Financial Econometrics in London for fruitful discussions and comments. However, the views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank, the Eurosystem or the Magyar Nemzeti Bank. CISS indicatorPlease find weekly updates of the CISS data here.

Financial Stress Index and Economic Activity in South Africa: New Evidence

“…Using six variables, the results of the study show that the FSI for most emerging markets exhibited a surge around September-October 2008 and this is assumed to have been caused by the emergence of the GFC (Stolbov and Shchepeleva 2016). In this study, following the studies of Holló et al (2012), Huotari (2015) and Ilesanmi and Tewari (2019a), a financial stress index for South Africa was developed by aggregating individual stress indicators from four different markets: the money market, bond market, equity market, and the foreign exchange market. Different aggregation methods have been used in literature such as the equal weighting method; correlation-based weighing method, principal component analysis, market size weight etc.…”

“…Several other attempts (Illing and Liu 2006;Hakkio and Keeton 2009;Holló et al 2012;Islami and Kurz-Kim 2014) have been made to develop a composite index for measuring financial stress. Researchers developed FSIs for the Canadian financial system, Kansas City and the Euro area.…”

“…Although several studies (Illing and Liu 2006;Hakkio and Keeton 2009;Holló et al 2012;Huotari 2015;Iachini and Nobili 2016;Ilesanmi and Tewari 2019a) have been conducted to develop a simple composite index to measure stress within the financial system, there is no consensus as most of the studies differs either in terms of the number of the market segment to be included, variables to be used in each market segment, data frequency or methodologies. The financial stress indicator (FSI) is a single aggregate indicator that is constructed to reflect the systemic nature of financial instability and as well to measure the vulnerability of the financial system to both internal and external shocks.…”

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“…CISS (Composite Indicator of Systemic Stress) was introduced in Hollo,Kremer and Lo Duca (2012), and it measures the state of the systemic financial instability in the euro area. There are two main reasons why this paper uses the CISS indicator.…”

“…There are two main reasons why this paper uses the CISS indicator. First, as explained in Hollo,Kremer and Lo Duca (2012), this variable covers the main…”