There are several financial stress indices provided by the Federal Reserve Banks which will often be correlated at the extreme but may provide useful unique information on financial markets. We look at three major indices: the St Louis Fed financial stress index, the Chicago Fed financial conditions index and adjusted financial conditions index, and the new NY Fed corporate stress index.
The St Louis Fed financial stress index - The index consists of 18 weekly data series; seven interest rates, six yield spreads, and five other indicators. There is also a Kansas City stress index, but it only comes out monthly.
The Chicago Fed financial conditions index (NFCI) - A comprehensive weekly update of financial conditions in money markets, debt and equity markets, as well as the shadow banking system. The Chicago Fed also produces an adjusted financial conditions index uncorrelated to economic conditions. This index is broader than the St Louis Fed index.
The NY Fed corporate bond market distressed index (CBMDI) - The distressed index focuses on seven corporate bond indicators to measure liquidity and stress in a corporate debt market. It is not a stress index across asset classes rather it is focused on liquidity and stress in corporate credit. The NY Fed has a general index as well as investment grade and high yield indices.
The NY Fed distressed index shows the most variation and has the slowest speed of adjustment after a stress shock. Market liquidity comes back slowly after a market shock. The correlations between these indices are high. The high correlation between stress indices (St Louis and Chicago Fed) and corporate bond spreads is related to the fact that these indices include short-term spreads while the distressed indices have exogenous factors from spreads.
These indices can provide a simple way of efficiently looking at stress from a set of indicators. If these are stress indicators are moving higher, market risks will have to be repriced.
No comments:
Post a Comment