Systemic Financial Stress and Macroeconomic Amplifications in the United Kingdom

Abstract: We develop a daily composite index of financial stress for the United Kingdom over 50 years, the UKFSI. The index includes market stress indicators based on their incremental information to capture financial crises. During the COVID‐19 crisis, financial stress peaks but remains less severe than during the Global Financial Crisis. The UKFSI is used in a threshold vector autoregression to differentiate the economic dynamics between tranquil and stressful periods. We highlight the importance of nonlinearities that amplify shocks. But we find no evidence of financial shocks contributing to the COVID‐19 crisis, possibly reflecting effective policy interventions.