Near-Coincident Indicators of Systemic Stress

IMF Working Papers, May 17, 2013

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Publication title: Near-Coincident Indicators of Systemic Stress
Authors: Ivailo Arsov, Elie Canetti, Laura E. Kodres, Srobona Mitra
Date: May 17, 2013
Objective: Responding to the G-20 Data Gaps Initiative request for standard measures of tail risk (identified in the paper with systemic risk); develop a measure of what constitutes a systemic stress (tail) event and use it to assess near-term systemic risk indicators.

Developed a measure of systemic stress (tail event) to identify conditions under which tail risk is present.
Assessed the performance of eleven near-term systemic risk indicators as “early” warnings of distress among top financial institutions in:
- the United States, and
- the euro area.
Performance results:
- Two indicators perform particularly well in both regions.
- A couple of other simple indicators do well across a number of criteria.
Additional empirical finding:
- The sizes of institutions do not necessarily correspond with their contribution to spillover risk.
Practical guidance for policies is provided (described in the paper).

Define a measure of systemic stress (tail event).
Use that measure to evaluate eleven near-term systemic risk indicators for early-warning capability regarding distress among top financial institutions in the United States and the euro area.

Subject areas: Banking; Cyclical indicators; Economic growth; Financial crises; Financial regulation and supervision; Financial sector policy and analysis; Financial services; Liquidity risk; Systemic risk; Yield curve.
Keywords include: a number of financial institutions, abnormal returns, bank Austria, bank CD, bank default, bank name abbreviation, BNP Paribas, Coincident Indicator, credit creation, Cyclical indicators, DD bank, Early Warning, Financial Stress, Global, JPoD indicator, Liquidity risk, name abbreviation, negative equity, Systemic Risk, Tail Risk, WP, Yield curve.