Forecasting Real Economic Activity using the Financial Stress Index: Evidence from Developed and Developing Countries.

Aim of this paper is the study of the financial stress - macroeconomic fundamentals interrelations and the usefulness of financial stress as a leading indicator of macrofundamentals. We construct a set of financial stress indices for 25 countries, both developed and developing. After assessing these indices ability to capture periods of macrofinancial instability, a forecasting exercise is conducted, where major macroeconomic variables are forecasted using the aforementioned early warning indicators. The out-of-sample forecasting evidence verifies the ability of these financial stress indices to act as valuable modern tools for assessing the vulnerability of a range of economies. We suggest that such aggregate financial risk capturing tools can be of great interest for policy makers, as well as individual investors. [ABSTRACT FROM AUTHOR]