A Financial Fragility Index for the U.S.
Anandi Sahu

As we all know well, a large number of statistical measures are used to monitor the U.S. economy and financial markets. Many of them are generated by the federal government (such as, GDP, housing starts, etc.). However, others are generated by private business entities (e.g., Purchasing Manager's Index) and educational institutions (University of Michigan's Consumer Confidence Index). I intend to produce an index that measures the financial fragility (and robustness) of the U.S. financial system. No such index exists at this time.

The underlying theory can be briefly explained as follows – as economic expansion proceeds, various types of participants in the economy (individuals, businesses and financial intermediaries) start taking greater risks. This results into a more fragile financial structure. The recent sub-prime lending meltdown is a good illustration of increased risk-taking in the later part of an economic cycle. A more fragile financial structure is more prone to failures, should the expansion (sector-wide or economy-wide) stop or decelerate.

The index I intend to generate will be called the "Financial Fragility Index." It actually will capture both fragility and robustness as the index will be allowed to vary both in positive and negative directions. The index once created will be updated periodically and publicized in financial circles. It will also be rigorously theoretically tested to show how well it tracks the expansion in the economy. The major steps involved in the project are as follows:

1. Literature review of studies related to financial fragility
   
2. Developing an index number that uses data to generate an index value
   
3. Collecting data (flow of funds data, and other data) needed
4. Generating the actual index
   
5. Testing to examine how good the index is
   
6. Putting the results together in at least one publishable paper.
   
7. Finding a sponsor to generate the index on a regular basis.