USING POLICY INTERVENTION TO IDENTIFY FINANCIAL STRESS: USING POLICY INTERVENTION TO IDENTIFY FINANCIAL STRESS

This paper describes the construction of a financial stress index. Our index incorporates the level, volatility, and co-movement of a variety of financial series, rather than a single dimension of the data. To determine which time periods are ones of notable financial stress, and thus the relevant for determining the role of the level, volatility, and co-movement of our financial series, we use actions taken by policymakers. In addition to describing the construction of our financial stress index, we spend time discussing issues relevant to the general construction of stress indexes such as how a financial stress index differs from a financial conditions index, the challenges of combining different financial series into a single measure, and the role historical experience plays in index construction.