Financial Vulnerability and Risks to Growth in Emerging Markets

36 Pages Posted: 8 Jul 2020

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

SOUMYA BHADURY

affiliation not provided to SSRN

Jay Surti

International Monetary Fund (IMF)

Multiple version iconThere are 3 versions of this paper

Date Written: June 9, 2020

Abstract

This paper introduces a new financial vulnerability index for emerging market economies by exploiting key differences in their business cycles relative to those of advanced economies. Information on the domestic price of risk, cost of dollar hedging and market-based measures of bank vulnerability combine to generate indexes significantly more effective in capturing macro-financial vulnerability and stress compared to those based on information in trade and global factors. Our index significantly augments early warning surveillance capacity, as evidenced by out-of-sample forecasting gains around a majority of turning points in GDP growth relative to distributed lag models that are augmented with information from macro-financial indexes that are custom-built to optimize such forecasts.

Keywords: Financial conditions, price of risk, vulnerability, business cycles, early warning indicators

JEL Classification: C53, E32, E44

Suggested Citation

Acharya, Viral V. and BHADURY, SOUMYA and Surti, Jay, Financial Vulnerability and Risks to Growth in Emerging Markets (June 9, 2020). Available at SSRN: https://ssrn.com/abstract=3623033 or http://dx.doi.org/10.2139/ssrn.3623033

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

SOUMYA BHADURY

affiliation not provided to SSRN

Jay Surti (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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