Federal Reserve Bank of Kansas City

The KCFSI is a monthly composite index of 11 variables reflecting stress in the U.S. financial system. These variables fall into two broad categories--average yield spreads, and measures based on the actual or expected behavior of asset prices. The index is calculated using the principal components procedure. Under this procedure, the coefficients of the 11 variables are chosen so that the index explains the maximum possible amount of total variation in the variables from February 1990 through the current month. Further details on the variables and the construction of the index can be found in Section II of “Financial Stress: What Is It, How Can It Be Measured, and Why Does It Matter?” by Craig S. Hakkio and William R. Keeton, Economic Review, Federal Reserve Bank of Kansas City, Second Quarter 2009.  The KCFSI is constructed to have a mean value of zero and a standard deviation of one. A positive value of the KCSFI indicates that financial stress is above the longrun average, while a negative value signifies that financial stress is below the long-run average. A useful way to assess the level of financial stress is to compare the index in the current month to the index during a previous episode of financial stress, such as October 2008. For more information on interpreting the index, see Section III of the article by Hakkio and Keeton.