Measuring Financial Stress A Country Specific Stress Index for Finland

Abstract

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Analysis of the Literature of Financial Stress Index and Proposed Model for Pakistan.

“…During the low-stress period, the banking sector and capital market were the primary sources of stress relief. Huotari (2015) also used three optional ways to generate an FSI for the Finnish financial system. The FSIs are monthly indices that measure the state of financial system instability.…”

“…There are several accumulation methods, comprising of equal weighing method, principal component analysis, regression-based weighing method, goal programming, and portfolio aggregation method, among others (Cardarelli et al, 2011). Principal component analysis (PCA) is a common component that is supposed to capture the stress that is extracted from many variables (Huotari 2015). According to Abdi and Williams (2010), PCA is a dimensional-reduction approach that has been used to decrease the dimensionality of massive data sets by morphing a large number of variables into a shorter one that also includes almost all of the information in a large number.…”

“…Specifically, the PCA infer that each of the variables used to create the FSI that apprehends some feature of financial stress. The Financial stress index also represents info on systemic stress which cannot be captured by the individual market stress measures (Huotari 2015). While the variance equal weight technique is the most generally used accumulation method (Illing and Liu 2006, Cevik et al, 2013, Park and Mercado 2014, Malega and Horváth, 2017 it doesn't capture the systemic nature of a stress event in contrast to the PCA (Hakkio and Keeton, 2009).…”

“…While the variance equal weight technique is the most generally used accumulation method (Illing and Liu 2006, Cevik et al, 2013, Park and Mercado 2014, Malega and Horváth, 2017 it doesn't capture the systemic nature of a stress event in contrast to the PCA (Hakkio and Keeton, 2009). Moreover, the variance equal weight (VEW) technique doesn't include comovement and correlation during diverse stress indicators (Huotari, 2015). This explains the use of Principal component analysis in addition to the VEW in this review study.…”

Labour Market Modelling in the Light of the Financial Crisis

“…The financial stress indicator for Finland is taken from Huotari (2015). In both countries, QPM essentially interprets unemployment as purely cyclical -as was the case for the US -making it difficult to distinguish any impact of financial variables.…”