IDEAS home Printed from https://ideas.repec.org/a/cbk/journl/v9y2020isip55-73.html
   My bibliography  Save this article

Financial Vulnerability and Economic Dynamics in Malaysia

Author

Listed:
  • Tai-Hock Kuek

    (Faculty of Economics & Business, Universiti Malaysia Sarawak, Sarawak, Malaysia)

  • Chin-Hong Puah

    (Faculty of Economics & Business, Universiti Malaysia Sarawak, Sarawak, Malaysia)

  • M. Affendy Arip

    (Faculty of Economics & Business, Universiti Malaysia Sarawak, Sarawak, Malaysia)

Abstract

This study attempts to develop a financial vulnerability indicator serving as a composite indicator for the state of financial vulnerability. The indicator was constructed from 10 variables of macroeconomic, financial and property market by extracting a common vulnerability component through the dynamic approximate factor model. On the feedback and amplification effects, the outcome revealed that financial vulnerability shock catalysed significant negative effects on economic activity in a high-vulnerability regime, while the impact was negligible in periods of low vulnerability. This study highlighted the usefulness of composite indicators as an early warning mechanism to gauge vulnerabilities in the Malaysian financial system.

Suggested Citation

  • Tai-Hock Kuek & Chin-Hong Puah & M. Affendy Arip, 2020. "Financial Vulnerability and Economic Dynamics in Malaysia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 55-73.
    • Handle: RePEc:cbk:journl:v:9:y:2020:i:si:p:55-73
    as

    Download full text from publisher

    File URL: http://www.cbcg.me/repec/cbk/journl/vol9si-3.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. International Monetary Fund, 2014. "Moldova Financial Sector Assessment Program," World Bank Publications - Reports 22907, The World Bank Group.
    2. Hong Puah, Chin & Kuek, Tai Hock & Arip, M. Affendy, 2017. "Assessing Thailand’s financial vulnerability: An early warning approach," Business and Economic Horizons (BEH), Prague Development Center (PRADEC), vol. 13(4), October.
    3. International Monetary Fund & World Bank, 2014. "Moldova Financial Sector Assessment Program," World Bank Publications - Reports 22911, The World Bank Group.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. Louzis, Dimitrios P. & Vouldis, Angelos T., 2012. "A methodology for constructing a financial systemic stress index: An application to Greece," Economic Modelling, Elsevier, vol. 29(4), pages 1228-1241.
    6. Stephen Cecchetti & Madhusudan Mohanty & Fabrizio Zampolli, 2011. "The real effects of debt," BIS Working Papers 352, Bank for International Settlements.
    7. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    8. International Monetary Fund, 2014. "Moldova Financial Sector Assessment Program," World Bank Publications - Reports 22909, The World Bank Group.
    9. Brüggemann, Axel & Linne, Thomas, 2002. "Are the Central and Eastern European Transition Countries still vullnerable to an Financial Crisis? Results from the Signals Approach," IWH Discussion Papers 157/2002, Halle Institute for Economic Research (IWH).
    10. Sofiane Aboura & Bjoern van Roye, 2017. "Financial stress and economic dynamics: The case of France," International Economics, CEPII research center, issue 149, pages 57-73.
    11. Katsuyuki Tanaka & Takuji Kinkyo & Shigeyuki Hamori, 2018. "Financial Hazard Map: Financial Vulnerability Predicted by a Random Forests Classification Model," Sustainability, MDPI, vol. 10(5), pages 1-18, May.
    12. Aboura, Sofiane & van Roye, Björn, 2013. "Financial stress and economic dynamics: An application to France," Kiel Working Papers 1834, Kiel Institute for the World Economy (IfW Kiel).
    13. Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
    14. Paresh Kumar Narayan & Stephan Popp, 2010. "A new unit root test with two structural breaks in level and slope at unknown time," Journal of Applied Statistics, Taylor & Francis Journals, vol. 37(9), pages 1425-1438.
    15. Emrah I. Cevik & Nuket Kirci-Cevik & Sel Dibooglu, 2016. "Global Liquidity and Financial Stress: Evidence from Major Emerging Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(12), pages 2790-2807, December.
    16. International Monetary Fund, 2014. "Canada: Financial Sector Assessment Program-Stress Testing-Technical Note," IMF Staff Country Reports 2014/069, International Monetary Fund.
    17. Cevik, Emrah I. & Dibooglu, Sel & Kenc, Turalay, 2016. "Financial stress and economic activity in some emerging Asian economies," Research in International Business and Finance, Elsevier, vol. 36(C), pages 127-139.
    18. Cevik, Emrah Ismail & Dibooglu, Sel & Kutan, Ali M., 2013. "Measuring financial stress in transition economies," Journal of Financial Stability, Elsevier, vol. 9(4), pages 597-611.
    19. Julia Giese & Henrik Andersen & Oliver Bush & Christian Castro & Marc Farag & Sujit Kapadia, 2014. "The Credit‐To‐Gdp Gap And Complementary Indicators For Macroprudential Policy: Evidence From The Uk," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 19(1), pages 25-47, January.
    20. repec:idn:journl:v:21:y:2019:i:3b:p:1-20 is not listed on IDEAS
    21. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-375, November.
    22. Jauhari Dahalan & Hussin Bin Abdullah & Mohammed Umar, 2016. "Measuring Financial Stress Index for Malaysian Economy," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 942-947.
    23. International Monetary Fund, 2014. "Moldova Financial Sector Assessment Program," World Bank Publications - Reports 22905, The World Bank Group.
    24. Marta Bańbura & Michele Modugno, 2014. "Maximum Likelihood Estimation Of Factor Models On Datasets With Arbitrary Pattern Of Missing Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(1), pages 133-160, January.
    25. Paresh Kumar Narayan & Stephan Popp, 2013. "Size and power properties of structural break unit root tests," Applied Economics, Taylor & Francis Journals, vol. 45(6), pages 721-728, February.
    26. Björn Roye, 2014. "Financial stress and economic activity in Germany," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 41(1), pages 101-126, February.
    27. Ravi Balakrishnan & Stephan Danninger & Selim Elekdag & Irina Tytell, 2011. "The Transmission of Financial Stress from Advanced to Emerging Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 47(0), pages 40-68, May.
    28. repec:idn:journl:v:21:y:2019:i:3f:p:1-14 is not listed on IDEAS
    29. Cevik, Emrah Ismail & Dibooglu, Sel & Kenc, Turalay, 2013. "Measuring financial stress in Turkey," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 370-383.
    30. Cardarelli, Roberto & Elekdag, Selim & Lall, Subir, 2011. "Financial stress and economic contractions," Journal of Financial Stability, Elsevier, vol. 7(2), pages 78-97, June.
    31. repec:zbw:bofitp:2002_005 is not listed on IDEAS
    32. World Bank & International Monetary Fund, 2014. "Financial Sector Assessment Program - Albania : Public Debt Management," World Bank Publications - Reports 19295, The World Bank Group.
    33. repec:idn:journl:v:22:y:2019:i:3b:p:1-24 is not listed on IDEAS
    34. Tng & Kwek, 2015. "Financial stress, economic activity and monetary policy in the ASEAN-5 economies," Applied Economics, Taylor & Francis Journals, vol. 47(48), pages 5169-5185, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. MARKOVIĆ Milan & MARJANOVIĆ Ivana, 2022. "Vulnerability To The Currency Crisis: The Case Of Serbia," Management of Sustainable Development, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 14(2), pages 17-21, December.
    2. Ján Buleca & Nikola Šubová & Lenka Malièká, 2022. "The Relationship between Household Wealth and Financial Vulnerability in the Post-communist Countries of the Euro Area," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 70(7-8), pages 569-588, July.
    3. Le Dinh Hac & Dinh Tran Ngoc Huy & Nguyen Ngoc Thach & Bui Minh Chuyen & Pham Thi Hong Nhung & Tran Duc Thang & Tran Tuan Anh, 2021. "Enhancing risk management culture for sustainable growth of Asia commercial bank -ACB in Vietnam under mixed effects of macro factors," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 8(3), pages 291-307, March.
    4. Soh, Ann-Ni, 2020. "A Review on the Leading Indicator Approach towards Economic Forecasting," MPRA Paper 103854, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mansour-Ichrakieh, Layal, 2020. "The impact of Israeli Geopolitical Risks on the Lebanese Financial Market: A Destabilizer Multiplier," MPRA Paper 99376, University Library of Munich, Germany.
    2. Layal MansourIshrakieh & Leila Dagher & Sadika El Hariri, 2020. "A financial stress index for a highly dollarized developing country : The case of Lebanon," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 20(2), pages 43-52.
    3. Haddou, Samira, 2022. "International financial stress spillovers to bank lending: Do internal characteristics matter?," International Review of Financial Analysis, Elsevier, vol. 83(C).
    4. Mansour Ishrakieh, Layal & Dagher, Leila & El Hariri, Sadika, 2018. "The Institute of Financial Economics Financial Stress Index (IFEFSI) for Lebanon," MPRA Paper 116054, University Library of Munich, Germany.
    5. Altınkeski, Buket Kırcı & Cevik, Emrah Ismail & Dibooglu, Sel & Kutan, Ali M., 2022. "Financial stress transmission between the U.S. and the Euro Area," Journal of Financial Stability, Elsevier, vol. 60(C).
    6. Begüm Yurteri Kösedağlı & A. Özlem Önder, 2021. "Determinants of financial stress in emerging market economies: Are spatial effects important?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4653-4669, July.
    7. Theshne Kisten, 2019. "A financial stress index for South Africa: A time-varying correlation approach," Working Papers 805, Economic Research Southern Africa.
    8. Hussin Abdullah & Jauhari Dahalan & Khaw Lee Hwei & Mohammed Umar & Md Mohan Uddin, 2017. "Malaysian Financial Stress Index and Assessing its Impacts on the Economy," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 227-235.
    9. Kondoz, Mehmet & Kirikkaleli, Dervis & Athari, Seyed Alireza, 2021. "Time-frequency dependencies of financial and economic risks in South American countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 170-181.
    10. Tan, Sook-Rei & Li, Changtai & Yeap, Xiu Wei, 2022. "A time-varying copula approach for constructing a daily financial systemic stress index," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    11. Mansour-Ichrakieh, Layal & Zeaiter, Hussein, 2019. "The role of geopolitical risks on the Turkish economy opportunity or threat," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    12. Xuan Lv & Menggang Li & Yingjie Zhang, 2022. "Financial Stability and Economic Activity in China: Based on Mixed-Frequency Spillover Method," Sustainability, MDPI, vol. 14(19), pages 1-22, October.
    13. Jauhari Dahalan & Hussin Bin Abdullah & Mohammed Umar, 2016. "Measuring Financial Stress Index for Malaysian Economy," International Journal of Economics and Financial Issues, Econjournals, vol. 6(3), pages 942-947.
    14. Smaranda CIMPOERU, 2015. "THE CHALLENGE OF MEASURING FINANCIAL STRESS. CASE STUDY FOR IDENTIFYING THE MACROECONOMIC TRIGGERS OF FINANCIAL CRISIS WITH PANEL DATA MODELS Abstract : Measuring financial stress is a key research is," EcoForum, "Stefan cel Mare" University of Suceava, Romania, Faculty of Economics and Public Administration - Economy, Business Administration and Tourism Department., vol. 4(Special I), pages 1-31, august.
    15. Nadri , Kamran & Ebrahimi , Sajad & Fadaie , Abbas, 2018. "An Investigation of Co-Movement of Financial Stability Index with Macro-Prudential Indicator through Wavelet Analysis," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 13(2), pages 125-151, April.
    16. Truong, Chi & Sheen, Jeffrey & Trück, Stefan & Villafuerte, James, 2022. "Early warning systems using dynamic factor models: An application to Asian economies," Journal of Financial Stability, Elsevier, vol. 58(C).
    17. Dovern, Jonas & van Roye, Björn, 2014. "International transmission and business-cycle effects of financial stress," Journal of Financial Stability, Elsevier, vol. 13(C), pages 1-17.
    18. Apostolakis, George N. & Floros, Christos & Gkillas, Konstantinos & Wohar, Mark, 2021. "Financial stress, economic policy uncertainty, and oil price uncertainty," Energy Economics, Elsevier, vol. 104(C).
    19. Cevik, Emrah I. & Dibooglu, Sel & Kenc, Turalay, 2016. "Financial stress and economic activity in some emerging Asian economies," Research in International Business and Finance, Elsevier, vol. 36(C), pages 127-139.
    20. Yao, Xiaoyang & Le, Wei & Sun, Xiaolei & Li, Jianping, 2020. "Financial stress dynamics in China: An interconnectedness perspective," International Review of Economics & Finance, Elsevier, vol. 68(C), pages 217-238.

    More about this item

    Keywords

    Financial Vulnerability Indicator; Financial Crises; Macro-financial Linkages; Markov-switching Bayesian VAR.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cbk:journl:v:9:y:2020:i:si:p:55-73. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/cbmgvme.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.