A SINGLE COMPOSITE FINANCIAL STRESS INDICATOR AND ITS REAL IMPACT IN THE EURO AREA

ABSTRACT In this paper, we construct a single composite financial stress indicator (FSI), which aims to predict developments in the real economy in the euro area. Our FSI was shown to perform better than the Euro STOXX 50 volatility index for the recent banking crisis and the euro‐area sovereign debt crisis and to be able to serve as an early warning indicator for negative impacts of financial stress on the real economy. Copyright © 2013 John Wiley & Sons, Ltd.