Publication

In this paper, the authors develop a financial stress index that can be used as a real-time composite indicator for the state of financial stability in France. 17 financial variables are used from different market segments to extract a common stress component using a dynamic approximate factor model. The authors show that an episode of high financial stress is associated with significantly lower economic activity, whereas movements in the index in a low-stress regime do not incur significant changes in economic activity. Therefore, this index can be used in real-time as an early warning signal of systemic risk in the French financial sector.