Assessing and Predicting Stress Events: The Case of Turkey

Abstract

After seeing the effect of the global crisis on the financial and real sectors, the studies have been more focused on building stress indices that show the accumulation of stress levels in the countries` financial system due to the external and internal shocks. This paper aims at creating three stress indices (real economy, financial institutions, and financial markets) that capture the correct stress level at a respective time period. For doing this, I use the equal variance weighting method, principal component method, and portfolio theory method, namely, composite indicator of systemic stress which are the most widely utilized methods in the financial stress literature. After building three indices, I utilize the discrete choice methods which are probit and logit models to predict systemic financial crises in financial markets by combining 16 daily published stress indicators in financial markets.