Measuring Financial Systemic Stress In Romania: A Composite Indicator Approach

The authorities and financial supervisors recognized, following the financial and economic crises, that the process of identification of systemic risks should receive more attention. The aim of this paper is to construct a financial systemic stress indicator which aims to predict which financial stress tends to depress the real economy in Romania. We obtained the composite indicator with the aggregation of five market-specific subindices created from individual financial stress measures (foreign exchange market, bond market, equity market, money market and banking sector). The systemic nature of stress is captured by the time-varying correlations between market segments. This indicator represents a real-time measure of systemic risk and quantify stress in the Romanian financial system. The results show that the financial systemic stress index is able to provide a periodization of crises.