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Financial Stress Index: A Lens for Supervising the Financial System


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.

This paper develops a new financial stress measure (Cleveland Financial Stress Index, CFSI) that considers the supervisory objective of identifying risks to the stability of the financial system. The index provides a continuous signal of financial stress and broad coverage of the areas that could indicate it. The construction methodology uses daily public market data collected from different sectors of financial markets. A unique feature of the index is that it employs a dynamic weighting method that captures the changing relative importance of the different sectors of the financial system. This study shows how the index can be applied to monitoring and analyzing financial system conditions.

Keywords: financial system stability, systemic risk, financial stress, financial supervision, financial stress index.
JEL classification: G01, G10, C22, C52, E32, E44, E66.

This paper is a significant revision of an earlier working paper ("The Financial Stress Index: Identification of Systemic Risk Conditions," working paper no. 11-30), which was last revised in October 2011.


Suggested citation: Bianco, Timothy, Dieter Gramlich, Mikhail V. Oet, and Stephen J. Ong, 2012. "Financial Stress Index: A Lens for Supervising the Financial System," Federal Reserve Bank of Cleveland, Working Paper no. 12-37.

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