Evaluating financial stress indicators: evidence from Indian data
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Connects with: @cardarelli2011 @hakkio2009 @hollo2012 @illing2006
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mundra2021 - p. 117
The literature provides alternative definitions of financial stress. Morales and Estrada (2010) determine stress levels by combining bank profitability and default probability. Grimaldi (2010) defines stress as the product of the vulnerability of markets and shocks. The more vulnerable markets possible produce a shock that generates stress. Hakkio and Keeton (2009) describe stress as an interruption to the normal functioning of financial markets. Hollo et al. (2012) define stress in broader terms by combining friction, stress and strains in the financial system. Cardarelli et al. (2011) define the episodes of financial stress as extreme values of a composite variable. The composite variable is derived from several market-based indicators.
mundra2021 - p. 117
The main focus of this paper is to assess alternative FSI for an emerging market economy, such as India, in terms of tracing crisis events, mapping with the business cycle and the macroeconomic effect of stress indices.
mundra2021 - p. 117
dynamic conditional correlation-generalized autoregressive conditional heteroscedasticity (DCC-GARCH)
mundra2021 - p. 118
Hollo et al. (2012) rely on this notion of systematic stress and use the portfolio theoretic aggregation approach, which considers the time-varying crosscorrelation between sub-indices.
mundra2021 - p. 128
The theory suggests that rising financial stress is a prominent channel of transmission through which it adversely affects economic activity. Uncertainty about financial outlook increases volatility in the market. Therefore, the firms in times of heightened financial stress adopt a wait-and-see approach about its investment decisions (Dixit and Pindyck, 1994; Bicchal and Durai, 2020). This may suggest that heightened financial stress will shrink investment and output.
mundra2021 - p. 131
Overall, the empirical evidence suggests that financial stress significantly decelerates economic activity.