Abstract

MOTA ARAGON, M. Beatriz; ALVAREZ DEL CASTILLO, Raúl  and  NUNEZ MORA, José Antonio. Financial stress index in emerging markets. Anál. econ. [online]. 2021, vol.36, n.92, pp.29-44.  Epub Oct 04, 2021. ISSN 2448-6655.  https://doi.org/10.24275/uam/azc/dcsh/ae/2021v36n92/mota.

This work proposes to construct an index of financial stress of emerging markets (IEFME) that identifies financial stress periods and the emerging markets’ major volatility. The series of 19 emerging economies of Latin America, Europe and Africa and Emerging Asia have been used. The used financial variables are the localexchange rates of each country against the US dollar, the insurance premiums for protection against default in dollars or the 5-year Credit Default Swaps (CDS), their main stock indices and the interest rates at 1, 5 and 10 years, in the period 2003-2019. The methodology of Principal Component Analysis (PCA) is proposed for the construction of the financial stress index since it allows to summarize in a single indicator the level of “generalized stress” in the financial markets of emerging countries, in addition to identifying the state of the different markets over time. Once the first components are obtained, the volatility for each of them is estimated using the GARCH (1,1) model.

Keywords : Financial stress index; volatility; principal components; GARCH (1,1); emerging financial markets; G15; G12.

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