This paper develops a composite indicator of systemic stress (CISS) for Korea to enhance early warning of financial crisis. The index includes money, bond, equity, financial intermediaries, foreign exchange market based on Hollo, et al(2012). Especially in Korea, real estate accounts for high proportion of individual assets. Therefore, author propose to incorporate real estate market into index to reflect financial industry fully.
<br>The methodology to aggregate subindices is application of portfolio theory considering time-varying cross correlations between subindices. To find out real impact on CISS, analysis is conducted when real estate market included or excluded.
<br>It is important to forecast future value of CISS to prepare financial crises. In this paper, author uses Vector Autoregressive with other macro variables. Although it is less predictive than the infrequent leading economic index, it has a higher predictive power than other indexes that show financial instability.
