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Issue Q1 2017  
Financial stress and economic dynamics: The case of France  
Sofiane Aboura
Bjoern van Roye
In this paper, we develop a financial stress index (FSI) that can be used as a real-time composite indicator for the state of financial stability. We take 17 financial variables from different market segments and extract a common stress component using a dynamic approximate factor model. We estimate the model with a combined maximum-likelihood and Expectation-Maximization algorithm allowing for mixed frequencies and an arbitrary pattern of missing data. Using a Markov-Switching Bayesian vector autoregressions (MS-BVAR), we show that while episodes of high financial stress are associated with significantly lower economic activity, episodes of low financial stress regime are negligible with respect to economic dynamics. The financial stress index can be used to gauge the stability of the French financial sector. Abstract

Financial stress index ; Financial crises ; Financial stability ; Macro-financial linkages ; Bayesian Markov-Switching VAR ; Keywords
E44 ; F3 ; G01 ; G20 ; G14 ; JEL classification
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