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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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    3. 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.
    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. 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.
    6. 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).
    7. Kpégo Didier Anatole Gbenou, 2018. "Modélisation de la prévision du stress financier du système bancaire des pays de l'UEMOA: Evidence empirique du rôle des facteurs institutionnels," African Development Review, African Development Bank, vol. 30(3), pages 264-277, September.
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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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