THE CHALLENGE OF MEASURING FINANCIAL STRESS. CASE STUDY FOR IDENTIFYING THE MACROECONOMIC TRIGGERS OF FINANCIAL CRISIS WITH PANEL DATA MODELS

Measuring financial stress is a key research issue that has gained a lot of interest in the years following the extreme events from 2007. Although a lot of models were used for assessing and measuring financial stress, none of the managed to forecast the global crisis from 2007. We can identify three generation of models plus the approach of measuring the probability of a crisis with financial stress indexes. In our paper, we review briefly the most important approaches in measuring financial stress from the specialty literature and we propose a case study for European countries. We apply a logistic regression model for panel data, using macroeconomic indicators with the goal of finding the most important triggers for a financial crisis or otherwise said, the early warning signals of a crisis. We obtain very good accuracy of the proposed model (85%) and the results are of great importance for policy makers and also for researchers. The study highly contributes to the specialty literature, considering that it is the first early warning system developed on macroeconomic indicators only for European advanced and emerging economies. Moreover, it includes in the analysis a period of five year following 2007.