Friday, April 15, 2011

Financial Stress Index Back to Oct. 2007 Level

The St. Louis Federal Reserve updated its Financial Stress Index yesterday for the week ending April 8, see chart above (data here).  This index measure of the amount of financial stress affecting the markets (explanation here) based on 18 individual variables including seven different interest rates, six interest rate yield spreads, and five measures of market volatility.  According to the St. Louis Fed, each of the 18 component variables in the Financial Stress Index captures some aspect of financial stress in the markets, and the Financial Stress Index incorporates the 18 variables into a single, composite index measure that tracks the amount of overall financial stress in the markets.   

The chart above shows that the St. Louis Fed Financial Stress Index has now returned to the pre-recession, pre-financial crisis levels that prevailed back in the fall of 2007.  The reading for last week of -0.085 was the lowest stress index value since the second week of October 2007, and provides evidence that U.S. financial markets have made a complete recovery from the financial crisis in the fall of 2008 that drove the Stress Index to record high levels above 5.  

8 Comments:

At 4/15/2011 9:49 AM, Blogger morganovich said...

what is this intended to show?

it was right at these levels just before the economy blew up the last time.

so, we're just as healthy as we were at the end of 2007?

why does that not fill me with confidence?

this index looks to have no forward predictive value at all.

 
At 4/15/2011 10:13 AM, Blogger Buddy R Pacifico said...

"what is this intended to show"

Stress -- Financial Stress Index.

A thermometer has no predictive value when it is 98.6, but a reading of 105 is high stress. no?

 
At 4/15/2011 10:22 AM, Blogger morganovich said...

buddy-

but this whole model is based on rate spreads. how is that stress yet not allegedly predictive?

further, why should we trust a model based on rates that are currently more heavily manipulated (through fed buying) that at any time in US history?

wouldn't that pretty much queer the inputs and make any output unreliable?

 
At 4/15/2011 10:42 AM, Blogger juandos said...

Professor Perry drawing some attention with this particular posting...

Out of curiosity I did a Google search for: "Financial Stress Index" and right from the first entry (of several many also citing Professor Perry) there's Professor Perry's name cited as the source...

Very cool!

 
At 4/15/2011 10:51 AM, Blogger morganovich said...

juandos-

either that or it's a sign that absolutely no one else uses this index...

 
At 4/15/2011 12:49 PM, Blogger juandos said...

"either that or it's a sign that absolutely no one else uses this index"...

Oh now morganovich be nice...:-)

 
At 4/19/2011 3:28 PM, Blogger VangelV said...

further, why should we trust a model based on rates that are currently more heavily manipulated (through fed buying) that at any time in US history?

The proper answer is that we shouldn't. The Fed wishes to manipulate opinion so that it can direct economic activity. The problem that it has is that the more that it does the greater the stress on the currency, something that Bernanke and company are quite silent about.

 
At 4/19/2011 4:10 PM, Blogger VangelV said...

OK Mark, I will play. How can you trust the various reports that you keep quoting when you have JPM's CEO, whining about homes sitting rotting for more than a year even as his company is reducing loan loss reserves? Does the fact that FASB is allowing accounting games mean that there is no stress in the system? I don't think so. In fact, I would say that the stress is simply being ignored by the Fed as it manipulates rates and markets to send a false signal to those naive enough to believe in what it is selling.

 

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