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Financial stress and economic dynamics: The case of France

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  • Sofiane Aboura
  • Bjoern van Roye

Abstract

In this paper, we develop a financial stress index (FSI) that can be used as a real-time composite indicator for the state of financial stability. We take 17 financial variables from different market segments and extract a common stress component using a dynamic approximate factor model. We estimate the model with a combined maximum-likelihood and Expectation-Maximization algorithm allowing for mixed frequencies and an arbitrary pattern of missing data. Using a Markov-Switching Bayesian vector autoregressions (MS-BVAR), we show that while episodes of high financial stress are associated with significantly lower economic activity, episodes of low financial stress regime are negligible with respect to economic dynamics. The financial stress index can be used to gauge the stability of the French financial sector.

Suggested Citation

  • Sofiane Aboura & Bjoern van Roye, 2017. "Financial stress and economic dynamics: The case of France," International Economics, CEPII research center, issue 149, pages 57-73.
    • Handle: RePEc:cii:cepiie:2017-q1-149-5
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    Keywords

    Financial stress index; Financial crises; Financial stability; Macro-financial linkages; Bayesian Markov-Switching VAR;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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