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Tracking Recent Levels of Financial Stress - July

Advisory: This article is based in whole or in part on the CFSI (Cleveland Financial Stress Indicator), an indicator that was discontinued by the Federal Reserve Bank of Cleveland in 2016 due to the discovery of errors in the indicator’s construction. These errors overestimated stress in the real estate and securitization markets. As a result, readers should be cautious and interpret any analysis based on CFSI data with those errors in mind.

The Cleveland Financial Stress Index (CFSI) remained in Grade 2 or a “normal stress” period throughout the early part of second quarter 2014. More recently, the index has trended downward into Grade 1 or a “low stress” period. As of June 27, the index stands at −0.860, which is 3.966 standard deviations below the historic high in December 2008 and 1.244 standard deviations above the historical low in January 2014. The index is down 0.837 standard deviations from this time last year.

Figure 1: Cleveland Financial Stress Index

The increased contributions of the equity and securitization markets to overall financial stress were responsible for the index remaining in Grade 2 for much of the quarter. The index moved back into Grade 1 as the securitization and equity contributions waned and stock prices reached historic highs in June. The CFSI’s credit, funding, real estate, and foreign exchange markets remained relatively stable over the quarter.

Figure 2: Stress Level Contributions of Component Markets to CFSI
Figure 3: Equity Market Contribution to Stress

The Cleveland Financial Stress Index and all of its accompanying data are posted to the Federal Reserve Bank of Cleveland’s website at 3 pm daily. For a brief overview of how the index is constructed see this page. The CFSI and its components are also available on FRED (Federal Reserve Economic Data), a service of the Federal Reserve Bank of St. Louis. FRED allows users to download, graph, and track more than 200,000 data series.

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