Near-Coincident Indicators of Systemic Stress

Abstract

The G-20 Data Gaps Initiative has called for the IMF to develop standard measures of tail risk, which we identify in this paper with systemic risk. To understand the conditions under which tail risk is present, it is first necessary to develop a measure of what constitutes a systemic stress, or tail, event. We develop such a measure and uses it to assess the performance of eleven near-term systemic risk indicators as 'early' warning of distress among top financial institutions in the United States and the euro area. Two indicators perform particularly well in both regions, and a couple of other simple indicators do well across a number of criteria. We also find that the sizes of institutions do not necessarily correspond with their contribution to spillover risk. Some practical guidance for policies is provided. JEL Classification Numbers: G01, G17, G21

Systemic Risk and the Macroeconomy: An Empirical Evaluation

“…Such a VaR 10 We do not include the volatility connectedness measure of Diebold and Yilmaz (forthcoming). Arsov et al (2013) shows that this is a dominant leading indicator of financial sector stress in the recent crisis. Unfortunately, the Diebold-Yilmaz index is only available beginning in 1999 and thus does not cover a long enough time series to be included in our tests.…”

How connected is the global sovereign credit risk network?

“…Fourth, as shown by Diebold and Yilmaz (2015), these measures closely relate to other popular risk measures such as CoVaR (Adrian and Brunnermeier (2008)) and marginal expected shortfall (Acharya et al (2010)). Fifth, predictive power of these measures are among the highest (Arsov et al (2013)) of the existing indicators, i.e. they adapt to the changes in data relatively faster.…”

An Overview of Macroprudential Policy Tools

“…Otherwise, work has mostly focused on the identification and measurement of systemic risks due to contagion and other spillovers in interbank and other financial markets (Bisias et al 2012, andAdrian, Covitz, andLang, 2013, reviews tools for financial system monitoring, as applied largely to the US; see Arsov et al 2013 for a more general review). Many central banks, supervisory agencies and international agencies now also supervise their large financial institutions, including insurance corporations, more closely (as the "too big to fail" problem is still prevalent; see further IMF, 2014b, and.…”