FINANCIAL RISK METER FOR THE ROMANIAN STOCK MARKET

This article aims to estimate the systemic risk of the Romanian stock market, using the FRM (Financial Risk Meter) methodology. This research contribution is about applying a novel systemic risk index to the Romanian financial system (FRM@RO), to identify potential sources of systemic risk, and to understand network interconnections, thus increasing risk awareness of both managers and regulators. By using data for companies listed at the Bucharest Stock Exchange (BSE), our article highlights several aspects of the systemic risk of the Romanian stock market. First, our study reveals that the main driver of systemic risk, especially during financial crises, is the volatility index, VIX. However, local factors, such as ROBOR interest rate and sectorial indices for financial investment companies, in general, and energy sector companies, in particular, are extremely important in triggering systemic risk. Second, the system risk indicator for the Romanian stock market, FRM@RO, may capture both investor sentiment, measured via the Google Trends Search Volume Index, and stock market volatility. Third, FRM@RO can act as an early warning indicator for economic turmoil, being able to predict periods of technical recession one quarter in advance. Fourth, by using network analysis, we can identify, daily, the level of market interconnectedness and highlight the main companies triggering tail co-movements. Fifth, we emphasize the need for an integrated early warning system for financial crises.