Title: Measuring uncertainty to identify financial instability
Authors: Ines Fortin - Institute for Advanced Studies (Austria) [presenting]
Jaroslava Hlouskova - Institute for Advanced Studies (Austria)
Leopold Soegner - Institute for Advanced Studies (Austria)
Abstract: A new index measuring financial (in)stability for Austria and for the Euro area is introduced based on market data (equity, bond, money, and foreign exchange markets). The new index is a so-called uncertainty index, which follows the existing methodology and is fundamentally different from the well-established financial stability indicators (FSIs). While FSIs measure the level of (in)stability in a financial system, the stress uncertainty index measures the degree of predictability of (in)stability. We examine the empirical relationship between the stress uncertainty index and the real economy (industrial production, employment), and the financial markets, considering impulse response functions in a small VAR setup, and compare the results to those implied by the relationship between an existing FSI (Composite indicator of Systemic Stress by the ECB) and the real economy. In addition, we examine whether the stress uncertainty index provides value added in forecasting the real economy by looking at different forecast performance measures.