Further development of the index for financial stress for Sweden

In this article, Tor Johansson and Fredrik Bonthron present the Riksbank's new index for financial stress in Sweden. Unlike the previous index, which the Riksbank has used since 2011, the new index contains several indications for each sub-market. The degree of stress on the stock market, bond market, money market and foreign exchange market is now measured by means of three indicators for each respective market. Each indicator receives a value by being given an order of rank in relation to all of the previous observations since 1995. The index is then calculated as a squared mean value of the indicators, adjusted for correlations between them. This adjustment is made to emphasize periods when there is stress on several sub-markets at the same time. The authors consider that the new index provides a better measure of financial stress than the previous one, as it takes more information into account, is less sensitive to individual sub-markets and more clearly emphasizes period of widespread stress.

The article is included in this year's first issue of the Sveriges Riksbank Economic Review, which was published on 21 March.