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

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.

North American Journal of Economics and Finance

North American Journal of Economics and Finance

63

1879-0860

N/A

N/A

20