St. Louis Fed Financial Stress Index

The St. Louis Fed Financial Stress Index (STLFSI) is an index measuring the degree of financial stress in markets published by the Federal Reserve Bank of St. Louis.

History

The STLFSI was first published in early 2010, with data going back to 1993, in an effort to better gauge levels of financial stress in the aftermath of the 2007-2008 financial crisis. It has been updated to the STLFSI2.[1][2][3]

Construction

Numerous ways to determine financial stress exist. Instead of focusing on just one variable at the expense of others, such as default risk or liquidity risk, this index encompasses multiple measures. Unlike the similar but less comprehensive Kansas City Financial Stress Index (KCFSI) from the Federal Reserve Bank of Kansas City that uses only 11 variables, this index uses 18 weekly data series that include seven interest rate series, six yield spreads and five other indicators to capture some element of financial stress:

The units are not seasonally adjusted. The data series are likely to move together as the level of financial stress in the economy changes. It is also updated and published weekly, on each Friday, instead of monthly. The data has a one-week lag.[4][5][6][7]

Interpretation and uses

The average value of the index is designed to be zero to represent normal financial market conditions. A value below zero indicates below-average financial market stress; a value above zero suggests above-average financial market stress. Movements in the index are measured in basis points.

The high and low of this index has varied widely. During times of financial stress, such as the Lehman Brothers or Fannie Mae and Freddie Mac bankruptcies of 2008, the Greek credit crisis of 2010, or the U.S. credit rating downgrade of 2011, the value on the index spiked.[8] It would then subsequently fall as concerns eased.[9][10]

The all-time high of 5.257 basis points on October 17, 2008, during the height of the financial crisis. It reached an all-time low of -1.602 basis points on February 14, 2020,[11][12] before rising as fears for the coronavirus became more widely held.[3]

The index also provides a way to analyze global liquidity. Research has determined the index is relevant to cross-border bank flows in 149 countries. Specifically, a 10% increase in the index means the countries receive on average 0.420% less cross-border bank loans.[13]

References

  1. "St. Louis Fed Financial Stress Index (DISCONTINUED)". FRED, Federal Reserve Bank of St. Louis. 31 December 1993. Archived from the original on 17 February 2020.
  2. "St. Louis Fed Financial Stress Index (STLFSI2)". FRED, Federal Reserve Bank of St. Louis. 26 March 2020. Archived from the original on 27 March 2020.
  3. "The St. Louis Fed's Financial Stress Index, Version 2.0 | FRED Blog". 26 March 2020. Archived from the original on 27 March 2020. The revised STLFSI, however, has increased sharply—reminiscent of the worst of the financial market turmoil during the Great Recession in 2008-2009—registering a value close to 5.8.
  4. "St. Louis Fed Financial Stress Index (STLFSI) Key | St. Louis Fed". www.stlouisfed.org. Retrieved 2020-03-08.
  5. "Measuring Financial Market Stress - January 2010" (PDF).
  6. "Measuring Financial Market Stress - February 2010" (PDF).
  7. "What Is the St. Louis Fed Financial Stress Index?". The Big Picture. 2014-06-29. Retrieved 2020-03-08.
  8. Carney, John (2013-06-25). "Financial Stress Index Hits Scary Level". www.cnbc.com. Retrieved 2020-03-08.
  9. "Fed Focus: Fin Stress Down; Global Growth Still Worries FOMC | MNI". www.marketnews.com. Retrieved 2020-03-08.
  10. Udland, Myles. "The Financial Stress Index Just Hit An All-Time Low". Business Insider. Retrieved 2020-03-08.
  11. "Stress index sinks to new low as Fed sedates markets". www.ft.com. Retrieved 2020-03-08.
  12. "Economic View". www.economy.com. Retrieved 2020-03-08.
  13. "Global Liquidity, Market Sentiment and Financial Stability Indices" (PDF).
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