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Analysis of Financial Stability: The Construction of a New Composite Financial Stability Index for Euro Area

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  • Vintu Denis

    (Bucharest Academy of Economic Studies)

  • Negotei Ioana-Alina

    (Bucharest Academy of Economic Studies)

Abstract

This paper develops new tool for the analysis of the Euro Area financial system using acomposite financial stability index (CFSI). The index was successful in capturing key periods offinancial instability during the sample period and reflected a general improvement in financialstability. The econometric results come to support the presence of a positive trend in the CFSIduring 1998-2006 and a recent reduction in volatility. To predict the level of stability and financialsector analysis, we used Monte Carlo simulation method that gives us further information aboutthe future of European financial sector. Moreover, our study results surprised the impact of thefinancial crisis on the main macroeconomic indicators in the Euro Area. The analysis covers theperiod 1998-2012, quarterly data used were obtained from the ECB – Area Wide Model (AWM)Database, Federal Reserve of Saint Louis and OECD.

Suggested Citation

  • Vintu Denis & Negotei Ioana-Alina, 2018. "Analysis of Financial Stability: The Construction of a New Composite Financial Stability Index for Euro Area," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 264-270, July.
    • Handle: RePEc:ovi:oviste:v:xviii:y:2018:i:1:p:264-270
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    References listed on IDEAS

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    1. Céline Crouzille & Lætitia Lepetit & Amine Tarazi, 2006. "Reaction of European bank stock prices to events of the Asian and Russian financial crises," Revue d'économie politique, Dalloz, vol. 116(4), pages 457-469.
    2. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department.
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    4. Adam Gersl & Jaroslav Hermanek, 2007. "Financial Stability Indicators: Advantages and Disadvantages of their Use in the Assessment of Financial System Stability," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2006, chapter 0, pages 69-79, Czech National Bank.
    5. Elke Hanschel & Pierre Monnin, 2005. "Measuring and forecasting stress in the banking sector: evidence from Switzerland," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 431-49, Bank for International Settlements.
    6. Mark Illing & Ying Liu, 2003. "An Index of Financial Stress for Canada," Staff Working Papers 03-14, Bank of Canada.
    7. Frederic S. Mishkin, 2000. "Financial stability and the Macroeconomy," Economics wp09, Department of Economics, Central bank of Iceland.
    8. John Fell & Garry Schinasi, 2005. "Assessing Financial Stability: Exploring the Boundaries of Analysis," National Institute Economic Review, National Institute of Economic and Social Research, vol. 192(1), pages 102-117, April.
    9. Fagan, Gabriel & Henry, Jerome & Mestre, Ricardo, 2005. "An area-wide model for the euro area," Economic Modelling, Elsevier, vol. 22(1), pages 39-59, January.
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    Cited by:

    1. Mahjus Ekananda, 2022. "The Nonlinear Impact of Payment System Innovation on Financial System Stability in the ASEAN-4 Countries," Economics and Finance in Indonesia, Faculty of Economics and Business, University of Indonesia, vol. 68, pages 114-131, Desember.

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    More about this item

    Keywords

    financial stability; composite financial stability index; stochastic modeling and simulation; quantitative methods for assessing systemic financial stability;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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