A time-varying copula approach for constructing a daily financial systemic stress index

Tan, Sook Rei, Li, Changtai, and Yeap, Xiu Wei (2022) A time-varying copula approach for constructing a daily financial systemic stress index. North American Journal of Economics and Finance, 63. 101821.

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Abstract

This paper develops a financial systemic stress index (FSSI) for the US financial market. We propose a time-varying copula method to model the dependence structure among financial sectors in order to build a correlated financial stress model that can signal systemic financial risks. The copula method is preferable to the traditional approach, enabling the modeling of non-linear correlations. Our analyses show that the dependencies across banking, security, and forex markets are best modeled by Archimedian copulas. Finally, we conduct a Markov Switching Autoregressive (MS-AR) model for FSSI and identify high financial stress episodes taking place in 2008–2009, 2011 and 2020.

Item ID: 76684
Item Type: Article (Research - C1)
ISSN: 1879-0860
Copyright Information: © 2022 Elsevier Inc. All rights reserved. AAM may be made open access in an Institutional Repository under a CC BY-NC-ND license after a 24 month embargo.
Date Deposited: 02 Nov 2022 22:42
FoR Codes: 38 ECONOMICS > 3801 Applied economics > 380107 Financial economics @ 100%
SEO Codes: 15 ECONOMIC FRAMEWORK > 1502 Macroeconomics > 150299 Macroeconomics not elsewhere classified @ 100%
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