A Spanish Financial Market Stress Index (FMSI)

Abstract

The relevance of systemic risk was highlighted by the economic and financial crisis starting in mid-2007. Supervisors and regulators recognized the need to improve the process of identification, management and mitigation of systemic risk. This paper introduces a Spanish Financial Market Stress Indicator (FMSI), similar to the “Composite Indicator of Systemic Stress” that Holló et al. (2012) proposed for the euro area as a whole. This indicator, which represents a real-time measure of systemic risk, tries to quantify stress in the Spanish financial system and describes the contribution of each financial market segment (bond market, equity market, money market, financial intermediaries, forex markets and derivatives) to the total stress in the system. The methodology takes into account time-varying correlations between market segments. The study analyses the ability of the FMSI to identify past periods of high financial stress and presents two econometric approaches with the aim of classifying observations into different stress regimes and of determining if financial stress has a negative impact on the real economy.