Financial stress and economic activity in some emerging Asian economies

This paper investigates episodes of financial stress and its relationship to economic activity in some Southeast Asian economies. To that end, we use a dynamic factor model to construct a financial stress index for Indonesia, South Korea, Malaysia, the Philippines, and Thailand and examine the relationship between financial stress and economic activity. Our financial stress index consists of riskiness in the banking sector, security market risk, currency risk, external debt and sovereign risk. Empirical results indicate that our financial stress index tracks recessions closely in the sample and impulse response functions suggest financial stress causes significant economic slowdowns.