Determinants of Financial Stress in Emerging Market Economies

Publication | July 2013

Financial shocks originating from advanced and emerging economies exert significant influence on domestic financial stress of emerging market economies. Regional shocks have a greater impact on domestic financial stress in emerging Asia.

The global financial crisis of 2008-2009 illustrates how financial turmoil in advanced economies could trigger severe financial stress in emerging markets. Previous studies dealing with financial crises and contagion show the linkages through which financial stress are transmitted from advanced to emerging markets. This paper extends the existing literature on the use of financial stress index (FSI) in understanding the channels of financial transmission in emerging market economies. Using FSI of 25 emerging markets, the panel regression estimates show that not only advanced economies FSI, but also regional and non-regional emerging market FSIs significantly increase domestic financial stress. Findings also suggest that there is a common regional factor significantly affecting domestic FSI in emerging Asia and emerging Europe. Furthermore, the results from a structural vector autoregression model with contemporaneous restrictions indicate that although a domestic financial shock still accounts for most of the variation in domestic FSI, regional shocks play an important role in emerging Asia.

Contents 

  • Abstract
  • Introduction
  • Financial Stress Index
  • Determinants of Domestic Emerging Market FSI
  • Impact of Advanced and Other Emerging Market Financial Shocks on Domestic Emerging Market FSI
  • Summary and Conclusion
  • References