Measuring Financial Stress Index for Malaysian Economy

Jauhari Dahalan, Hussin Bin Abdullah and Mohammed Umar
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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.

International Journal of Economics and Financial Issues, 2016, vol. 6, issue 3, 942-947

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.

Keywords: Economic Indicators; Financial Crisis; Financial Stress Index; Malaysia (search for similar items in EconPapers)
JEL-codes: C43 G01 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (10)

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