Financial Stress Index as a Generalized Indicator of Financial Instability

The paper provides an overview of the methods and models for quantitative evaluation of the financial instability of economic systems. The authors identify the indicators of financial instability and show their connection with various stress tests, assessing the vulnerability of economic systems to various shocks. The main results of Russian and foreign studies devoted to the development of early warning systems of financial instability, including various leading indicators of currency, debt and banking crises, are discussed. Particular attention is paid to the experience of building an aggregated financial stress index (FSI) and its use as a generalized indicator of financial instability of economic systems. Using the vector model for error correction, the authors construct cointegration equations for three main variables demonstrating a quick response to external shocks: oil price, ruble exchange rate against the US dollar, and the RTS index. The application of the principal component analysis allowed the authors to aggregate adequately the information contained in these variables. Based on the moving average and standard deviation of the principal components’ growth rates, the authors propose a new financial stress index. In addition, with the help of this index the authors obtained estimates of the level of financial stress in the Russian economy from January 2000 up to February 2019 and revealed differences in the nature of financial stress during the 2008–2009 and 2014–2016 crisis periods.