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Measuring Financial Stress Index for Malaysian Economy

Author

Listed:
  • Jauhari Dahalan

    (Department of Economics and Agribusiness, School of Economics, Finance and Banking, Universiti Utara Malaysia, Kedah, Malaysia,)

  • Hussin Bin Abdullah

    (Department of Economics and Agribusiness, School of Economics, Finance and Banking, Universiti Utara Malaysia, Kedah, Malaysia)

  • Mohammed Umar

    (Department of Economics and Development Studies, Federal University Kashere, Nigeria.)

Abstract

The study measures financial stress index for Malaysian economy. We aggregate the identified financial and economic factors into a single index using the principal component analysis. The result shows that Malaysian Financial Stress Index (MFSI) increases as a result of increase in Banking Sector Fragility Index, credit stress, external debt, stock market volatility and Exchange Market Pressure Index. Moreover, the weights of the variables reveal that the magnitude of the Malaysian financial stress is mainly driven by the fragility of the banking sector. The combine variables explain about 53% of the total variation in the MFSI. Thus, the financial stress is determined to be the key player in the co-movement of the components used in the construction process. Furthermore, the aggregated components practically capture the known key aspects of financial stress in Malaysia. The implication of the finding is that authorities should focus more on banking sector stability than other components of the financial stress. This will help to reduce the overheating of the Malaysian financial stress.

Suggested Citation

  • 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.
    • Handle: RePEc:eco:journ1:2016-03-16
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    References listed on IDEAS

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    Cited by:

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    2. Tran, Thuy Nhung, 2022. "The Volatility of the Stock Market and Financial Cycle: GARCH Family Models," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(1), pages 151-168.
    3. 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.
    4. Marina Yu. Malkina & Rodion V. Balakin, 2023. "The Relation of Financial and Industrial Stresses to Monetary Policy Parameters in the Russian Economy," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 3, pages 104-121, June.
    5. Nihat Tak & Adem Gök, 2022. "Dating currency crises and designing early warning systems: Meta‐possibilistic fuzzy index functions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3773-3790, July.
    6. 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.
    7. Haddou, Samira, 2022. "International financial stress spillovers to bank lending: Do internal characteristics matter?," International Review of Financial Analysis, Elsevier, vol. 83(C).
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    More about this item

    Keywords

    Economic Indicators; Financial Crisis; Financial Stress Index; Malaysia;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • G01 - Financial Economics - - General - - - Financial Crises

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