Kiel Working Papers, Kiel Institute for World Economics
No 1834:
Financial stress and economic dynamics: an application to France
Sofiane Aboura and Björn van Roye
Abstract: In this paper, we develop a financial stress index for
France that can be used as a real-time composite indicator for the state of
financial stability in France. We take 17 financial variables from
different market segments and extract a common stress component using a
dynamic approximate factor model. We estimate the model with a combined
maximum-likelihood and Expectation-Maximization algorithm allowing for
mixed frequencies and an arbitrary pattern of missing data. Using a
Markov-Switching Bayesian VAR model, we show that an episode of high
financial stress is associated with significantly lower economic activity,
whereas movements in the index in a low-stress regime do not incur
significant changes in economic activity. Therefore, this index can be used
in real time as an early warning signal of systemic risk in the French
financial sector
Keywords: Financial stress index, Financial Systems, Recessions, Slowdowns, Financial Crises; (follow links to similar papers)
JEL-Codes: E44,; F3,; G01,; G20,; G14; (follow links to similar papers)
29 pages, March 2013
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