Measuring Financial Stress for Emerging and Developed Countries
Abstract
The current study adopted a comprehensive approach by developing monthly Financial Stress Indices (FSIs) for emerging and developed countries. The study built indices for 20 emerging economies at the country, aggregate, and region levels from January 1997 to December 2016. Similarly, the study constructed monthly FSIs at country and aggregate levels for 23 developed countries, covering the period from January 1993 to December 2016. Principal Component Analysis (PCA) was applied to develop these FSIs. The study determined that political risk is crucial in systemic Financial Stress (FS) in emerging countries, whereas financial and economic risk contribute significantly more to FS in developed countries. The study's unique contribution is the inclusion of political risks in constructing stress indices alongside economic and financial risks. It underscores the importance of promoting regional policy coordination and reducing domestic vulnerabilities to maintain financial stability.
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