When there is strength in numbers: an index of systemic risk.

Summary Following the last severe financial crisis, several measures of systemic risk have been proposed to quantify the state of stress of the financial system. In this paper, we propose an aggregate index of financial systemic risk measure based on a parsimonious principal component analysis. This methodology allows us to obtain an aggregate index that is more parsimonious and more stable over time. The application of the methodology to twelve measures of aggregate systemic risk using data from the US financial market confirms this property. It also appears that the extreme positive movements of the systemic risk index thus constructed can be considered as anticipations of periods of strong contraction of economic activity.