Financial Stress and the Economic Sensitivity Forecasts
About a year and a half ago CASE launched a project to compile the Financial Stress Index (FSI) and the Economic Sensitivity Index (ESI). The aim was to build a tool for forecasting stress that could influence economic and financial prospects in the economies of Central and Eastern European Countries (CEEC). The study was a continuation of the endeavor to construct synthetic indices for twelve Central and East European countries using the Principal Component Analysis method. The indices used for the forecasts were measured by the volatility of main macroeconomic and financial market variables. Ex-post evaluation and a strong correlation of the indices with GDP growth and OECD Composite Leading Indicator prompted us to show the results to the wider public.
Consequently, the effects of this work – Financial Stress Index and the Economic Sensitivity Index, created by CASE’s economists dr Maciej Krzak, Grzegorz Poniatowski and Katarzyna Wasik – were presented during the CASE Policy Research Seminar, which took place on the 9th of May, in CASE’s office.
FSI reflects the overall situation on financial markets. This index captures elevated asset prices, sudden increase of uncertainty in asset pricing, higher risk aversion, losses of liquidity and increased uncertainty in the banking sector. ESI is an indicator of sustained economic growth and stability of public finance. First of the indicators includes the following components: uncertainty about the value of assets, asymmetry of information propensity to invest in risky and illiquid assets as well as liquidity. The second one encompasses slow or over-extensive GDP growth, unstable public finance, current account deficits and high and volatile inflation.
The research results, as well as all detailed information about indicators, will be presented in an upcoming report: Forecasting Financial Stress and Economic Sensitivity in CEE countries (please subscribe to our newsletter not to miss it!). The publication also includes forecasts for the FSI and the ESI for the period 2014-2015 for six countries in the region, namely the Czech Republic, Estonia, Hungary, Latvia, Lithuania and Poland.
We also encourage you to read CASE Network Report 117: Measuring financial stress and economic sensitivity in CEE countries. This report presents the methodology for the construction of the Financial Stress Index and the Economic Sensitivity Index and investigates the economic situation in twelve Central and East European Countries (CEECs) between 2001 and 2012.
The seminar was organized thanks to the donation granted by Bank PEKAO S.A..
