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Financial stress and economic dynamics: An application to France

Author

Listed:
  • Sofiane Aboura

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Björn van Roye

    (ECB - European Central Bank - European Central Bank)

Abstract

In this paper, we develop a financial stress index for France that can be used as a real-time composite indicator for the state of financial stability in France. 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 VAR model, we show that an episode of high financial stress is associated with significantly lower economic activity, whereas movements in the index in a low-stress regime do not incur significant changes in economic activity. Therefore, this index can be used in real time as an early warning signal of systemic risk in the French financial sector.

Suggested Citation

  • Sofiane Aboura & Björn van Roye, 2017. "Financial stress and economic dynamics: An application to France," Working Papers hal-01526393, HAL.
    • Handle: RePEc:hal:wpaper:hal-01526393
    Note: View the original document on HAL open archive server: https://hal.science/hal-01526393
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial Stress Index; Financial Systems; Recessions; Slowdowns; Financial Crises;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F3 - International Economics - - International Finance
    • G2 - Financial Economics - - Financial Institutions and Services
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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