The UK Financial Stress Index (FSI) provides a daily assessment of financial conditions in the UK. The following paragraphs explain the components of and methodology behind it. For suggestions, underlying data, and discussion about the index, please contact our colleague Edoardo Palombo, who develops and maintains it.

What does it measure?

The FSI is a daily measure of stress in UK financial markets. The index uses interest rates/yield spreads, valuations and volatility to assess stress across six key financial market categories – short-term financing, sovereign debt, corporate debt, equities, foreign exchange, and real estate – and aggregates those assessments into a headline measure. For the monthly readings, we take the average FSI within the month.

The higher the FSI, the greater the stress. A positive reading signals that the UK financial system is experiencing higher than average levels of stress and a negative reading signals the opposite.

How is it constructed?

The FSI is computed by analysing readings of 15 variables across the six key financial market categories. For each variable within a category, we measure how divergent the current reading is from the norm and then average the divergence measures to construct the category index. Finally, we average the six category indices to construct the FSI.

What are the variables analysed?

Here is a list of the variables we analyse to assess stress across the following six key financial market categories:

1. Short-term funding: the difference between the 3-month LIBOR interbank interest rate and the 3-month UK gilt yield and volatility of the 3-month LIBOR interbank interest rate
2. Sovereign debt: the spread between yields on 10-year and 2-year gilts, the average of spread between yields on 10-year gilts and treasuries and the spread between yields on 10-year gilts and bunds, and volatility of 10-year UK gilt yields
3. Corporate debt: the spread between yields on 10-year AAA corporate bonds and 10-year gilts, and the spread between yields on 10-year BBB corporate bonds and 10-year AAA corporate bonds
4. Equities: the returns and volatility of the UK equities market
5. Foreign exchange: the de-trended trade-weighted UK sterling and its volatility
6. Real estate: the valuations and volatility of residential and commercial real estate investment trusts