A Composite Index for Tracking Financial Markets in Israel

The state of financial markets is reflected in the developments of many financial and economic series, and tracking these series on an ongoing basis is an inseparable part of any analysis of overall financial stability. However, the large number of series makes both ongoing tracking as well as assessing the situation of financial markets following events with crisis elements difficult. To simplify such tracking, we adjusted the solution used by the Fed to the Israeli market: We took a number of financial and economic series and consolidated them into one series, referred to as "the Index". This Index receives values between 0 and 1, where values of or near 0 indicate calm and values of or near 1 indicate a financial crisis. Other than the simplification achieved by tracking a single series, the Index also allows an analysis of events with crisis elements and the comparison of the extent of the damage to the financial markets caused by various events. A uniform and objective interpretation of the impact of various events on the financial markets can make the policy-setting process simpler. From a historical perspective, taking in the past decade, we see that the Index "captured" events that influenced financial stability and presented a different view of the severity of events that were considered at the time to be threats to financial stability. In addition, the Index indicates that over the years, the economy developed a resilience to security and political events.