Apart from the conventional ‘dummy variable’ approach for measuring financial crisis, what are the alternative proxies for measuring financial crisis when conducting research in areas of financial economics?
Level of VIX Index or an increase in the spread between yields of government bonds (in Europe as reference was used the German market)
give more detail. I can think of at least 2 methods: event studies, case studies
Looking at the past values of these two quantities we know that in turbulent markets VIX (measure of implied volatility) jumps at level greater than 25% while usually it is lower. The same holds for spreads, for example BTP-Bund spread for 5yrs reached 500bps while usually it stays below 200bps.
Thank u Edit Rroji, your suggestion for the alternative measure of financial crisis make sense to me. Other alternative measures of financial crisis are welcome.
i do not think there is a single proxy only. it should also depend on your window period - how soon do you want to detect the possibility of a crisis. if you look at currency crisis literature, for example, or attempt to construct a model of (to forecast/ predict) financial crisis, you will quickly realize the number of potential proxies/ factors. event studies and case studies, as well as modelling, normally surface all the relevant proxies/ factors
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