A Financial Stress Index for the United Kingdom

49 Pages Posted: 12 Dec 2017

Date Written: December 1, 2017

Abstract

In this paper we develop an index to monitor the intensity of financial stress in the UK over a period of 45 years. By aggregating various market-based indicators of financial stress from six major markets, we allow each indicator to be assessed in terms of its systemic importance. This enables the index to capture the interconnectedness of financial markets. The index successfully captures three episodes of heightened stress in UK financial history. We also attempt to determine how much a financial shock to the UK economy is amplified in a period of stress vis-à-vis a tranquil period. It involves exploring the dynamic relationship of the index with the UK real economy by two specifications of threshold vector auto-regression models. We find empirical evidence for the existence of feedback loops in the shock propagation between the real and the financial sector in the United Kingdom.

Keywords: Financial stress index, AUROC, GARCH, threshold VAR

JEL Classification: C31, C54, G01, G15

Suggested Citation

Chatterjee, Somnath and Chiu, Ching-Wai (Jeremy) and Hacioglu Hoke, Sinem and Duprey, Thibaut, A Financial Stress Index for the United Kingdom (December 1, 2017). Bank of England Working Paper No. 697, Available at SSRN: https://ssrn.com/abstract=3085789 or http://dx.doi.org/10.2139/ssrn.3085789

Somnath Chatterjee (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ching-Wai (Jeremy) Chiu

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Sinem Hacioglu Hoke

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Thibaut Duprey

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

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