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Working Paper

Financial Stress Index: A Lens for Supervising the Financial System

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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.
Topics
Financial stability
12.26.2012ISSN 2573-7953 WP 12-37DOI 10.26509/frbc-wp-201237
Keywords financial system stability, systemic risk, financial stress, financial supervision, financial stress index
JEL Classification Codes G01, G1, C22, C52, E32, E44, E66

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

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.

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.
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. https://doi.org/10.26509/frbc-wp-201237