The Transmission of Financial Stress From Advanced to Emerging Economies
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balakrishnan2009 - p. 6
To complement the indicators used in the literature, this chapter identifies episodes of financial stress in emerging economies using a composite variable—the “Emerging Markets Financial Stress Index” (EM-FSI).
balakrishnan2009 - p. 6
This is the first such measure providing comparable highfrequency data on stress for emerging economies
balakrishnan2009 - p. 6
an episode of financial stress is defined as a period when the financial system is under strain and its ability to intermediate is impaired. Financial stress tends to be associated with at least four fundamental characteristics: large shifts in asset prices, an abrupt increase in risk and/or uncertainty, liquidity droughts, and concerns about the health of the banking system.
balakrishnan2009 - p. 7
The five components of the EM-FSI are the “banking-sector beta,” denoted as β, stock market returns, time-varying stock market return volatility, sovereign debt spreads, and an exchange market pressure index (EMPI
balakrishnan2009 - p. 7
EM-FSI = β + Stock market returns + Stock market volatility + + Sovereign debt spreads + EMPI
balakrishnan2009 - p. 7
The “banking-sector beta” is the standard capital asset pricing model (CAPM) beta
balakrishnan2009 - p. 8
Stock market returns are computed as the year-on-year change in the stock index multiplied by minus one, so that a decline in equity prices corresponds to increased securities-market-related stress
balakrishnan2009 - p. 8
Stock market volatility is a time-varying measure of market volatility obtained from a GARCH(1,1) specification, using month-over-month real returns and modeled as an autoregressive process with 12 lags
balakrishnan2009 - p. 8
Sovereign debt spreads is defined as the bond yield minus the 10-year United States Treasury yield using JPMorgan EMBI Global spreads.
balakrishnan2009 - p. 8
The EMPI captures exchange rate depreciations and declines in international reserves
balakrishnan2009 - p. 8
The aggregation of these subindices into the EM-FSI is based on a variance-equal weighting. Under this method each component is computed as a deviation from its mean and weighted by the inverse of its variance (similar to Kaminsky and Reinhart, 1999).
balakrishnan2009 - p. 9
he EM-FSI is constructed for 26 countries roughly spanning the period from January 1997 to latest available and are published in conjunction with this paper
balakrishnan2009 - p. 36
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