Measuring financial stress – A country specific stress index for Finland

  • Jarkko Huotari
  • Published 2015

Abstract

I propose a financial stress index (FSI) for the Finnish financial system that aims to reflect the functionality of the financial system and provide an aggregate measure of financial stress in the money, bond, equity and foreign exchange markets and the banking sector. The FSI is a composite index that combines information from these markets and provides a measure of stress in the financial system as a whole. The FSI has obvious benefits for all participants in the financial markets who need a tool for monitoring the functioning of the financial markets, as it provides information on systemic stress events which are not as easily captured with the stress measures of individual markets or sectors. The ESRB recommendation (ESRB, 2014a) also states that national or international FSIs could be used when making a decision about the release of the counter-cyclical capital buffer. Hence, the index can also be used to support the macro-prudential policy decision making in Finland. *Email: jarkko.huotari@aalto.fi. The views presented in this article are those of the author and do not necessarily represent the views of the Bank of Finland. This work was done while I was working as an Economist Trainee at the Bank of Finland (Address: Bank of Finland, Financial stability and Statistics Department, P.o.Box 160, 00101 Helsinki, Finland. Email: RMsihteerit@bof.fi). A more comprehensive version of the study is going to be published as my Master’s thesis in Aalto University, Department of Finance. I would like to thank Helinä Laakkonen for her valuable support and guidance throughout the study. I also thank Esa Jokivuolle and other seminar participants for valuable comments given in the Annual Meeting of the Finnish Economic Association as well as Simo Kalatie for the research assistance at the Bank of Finland. Finally, I thank Manfred Kremer for his helpful comments and suggestions.

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Cite this paper

@inproceedings{Huotari2015MeasuringFS, title={Measuring financial stress – A country specific stress index for Finland}, author={Jarkko Huotari}, year={2015} }