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Financial Stress Indices and Financial Crises

Publication at Faculty of Social Sciences |
2015

Abstract

This paper develops a Financial Stress Index (FSI) for 28 OECD countries and examines its relationship to crises using a novel database for financial crises. A stress index measures the current state of stress in the financial system and summarizes it in a single statistic.

Our results suggest that even though our FSI is clearly related to the occurrence of crises, there is only a weak relationship between the FSI and the onset of a crisis, notably the onset of a banking crisis. Policymakers should therefore be aware of the limited usefulness of FSIs as an early warning indicator.