Determinants of Financial Stress in Emerging Market Economies

27 Pages Posted: 3 Apr 2013

See all articles by Cyn-Young Park

Cyn-Young Park

Asian Development Bank

Rogelio Mercado

Asian Development Bank

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2013

Abstract

The global financial crisis of 2008/09 illustrates how financial turmoil in advanced economies triggered severe financial stress in emerging markets. Previous studies showed the conditions and linkages through which financial stress is transmitted from advanced to emerging markets. This paper extends the existing literature on the use of financial stress index (FSI) in understanding this transmission. The computed financial stress index for twenty-five emerging markets captures key episodes of financial stress in emerging economies and appears to follow financial stress in advanced economies. Using panel regression, we find that advanced and emerging market FSI (excluding the country) significantly increases domestic emerging market FSI; global and domestic factors are both significant; and common regional factor appears significant for emerging Asia and emerging Europe, implying the vulnerability of both regions to regional financial contagion. (Results for the vector autoregression with blocked exogeneity to be included).

Keywords: emerging markets financial stress, financial crises, financial contagion

JEL Classification: F36, G15, G19

Suggested Citation

Park, Cyn-Young and Mercado, Rogelio, Determinants of Financial Stress in Emerging Market Economies (March 31, 2013). Systemic Risk: Liquidity Risk, Governance and Financial Stability. Available at SSRN: https://ssrn.com/abstract=2242382 or http://dx.doi.org/10.2139/ssrn.2242382

Cyn-Young Park

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines
(632) 632-5473 (Phone)

HOME PAGE: http://www.adb.org

Rogelio Mercado (Contact Author)

Asian Development Bank ( email )

6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines

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