Publication

The author of this report derives a financial market stress indicator for Germany and the Euro Area using a dynamic factor model. Subsequently, applying these indicators, he analyses the effects of financial stress on economic activity in a small Bayesian VAR model. He does this because, according to him, the financial crisis 2008-2009 and the European sovereign debt crisis have shown that stress on financial markets is important for analyzing and forecasting economic activity. Since financial stress is not directly observable but is presumably reflected in many financial market variables, it is useful to derive an indicator summarizing the stress component of these variables, the author argues.