Measuring financial stress - A country specific stress index for Finland

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dc.contributor Aalto-yliopisto fi
dc.contributor Aalto University en Huotari, Jarkko 2015-11-04T13:21:20Z 2015-11-04T13:21:20Z 2015
dc.description.abstract In this thesis, I develop a financial stress index (FSI) for the Finnish financial system. The FSI aims to reflect the functionality of the system and to provide an aggregate measure of financial stress in the money, bond, equity and foreign exchange markets as well as in 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 system, as it provides information on systemic stress events which are not as easily captured with the stress measures of individual markets or sectors. The index is based on market data and uses 14 individual financial stress measures and tests three different methods for the aggregation of these measures into a financial stress index. The resulting stress index is a continuous variable, with a monthly frequency and covers the most important parts of the financial system. The main practical motivation behind the study is the demand for a measure indicating general systemic stress in the financial system, emerging from the current issues of macro-prudential policy. Based on a literature review, I use variance-equal weighting, principal component analysis and an application of portfolio theory to form the FSI for Finland. I continue by assessing the different methods and resulting FSIs based on their ability to identify past financial stress periods as well as their ability to capture standard definitions of systemic financial stress. Finally, I also examine the relationship between financial stress, measured by the FSI, and the real economy. I use industrial production growth as a proxy for the development of the real economy. Utilizing three different regression models, I find that shocks in the FSI have a statistically significant negative effect on industrial production. Applying a threshold vector autoregressive model, I also find evidence that the relationship between stress and the real economy is nonlinear and the effects of a shock in the FSI depend on the prevailing state of the financial system. en
dc.format.extent 89
dc.language.iso en en
dc.title Measuring financial stress - A country specific stress index for Finland en
dc.type G2 Pro gradu, diplomityö fi Kauppakorkeakoulu fi School of Business en
dc.contributor.department Rahoituksen laitos fi
dc.contributor.department Department of Finance en
dc.subject.keyword financial system
dc.subject.keyword financial stability
dc.subject.keyword financial stress index
dc.subject.keyword financial crises
dc.subject.keyword systemic risk
dc.identifier.urn URN:NBN:fi:aalto-201511055014
dc.type.dcmitype text en
dc.programme.major Finance en
dc.programme.major Rahoitus fi
dc.type.ontasot Master's thesis en
dc.type.ontasot Pro gradu tutkielma fi
dc.subject.helecon rahoitus
dc.subject.helecon financing
dc.subject.helecon rahoitusmarkkinat
dc.subject.helecon financial markets
dc.subject.helecon systeemit
dc.subject.helecon systems
dc.subject.helecon kriisi
dc.subject.helecon crisis
dc.subject.helecon riski
dc.subject.helecon risk
dc.subject.helecon arviointi
dc.subject.helecon evaluation
dc.subject.helecon tunnusluvut
dc.subject.helecon financial ratios
dc.ethesisid 14117 2015-07-16
dc.location P1 I

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