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

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  • Vîntu, Denis
  • Negotei, Ioana-Alina

Abstract

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

Suggested Citation

  • Vîntu, Denis & Negotei, Ioana-Alina, 2018. "Analysis of Financial Stability: The Construction of a New Composite Financial Stability Index for Euro Area," MPRA Paper 107625, University Library of Munich, Germany, revised 15 Apr 2018.
    • Handle: RePEc:pra:mprapa:107625
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    File URL: https://mpra.ub.uni-muenchen.de/107625/1/MPRA_paper_107625.pdf
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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. Fell, John & Schinasi, Garry, 2005. "Assessing Financial Stability: Exploring the Boundaries of Analysis," National Institute Economic Review, National Institute of Economic and Social Research, vol. 192, pages 102-117, April.
    3. 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.
    4. 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.
    5. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department.
    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. Fell, John & Schinasi, Garry, 2005. "Assessing Financial Stability: Exploring the Boundaries of Analysis," National Institute Economic Review, National Institute of Economic and Social Research, vol. 192, 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.
    Full references (including those not matched with items on IDEAS)

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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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