Given the increased global and regional interconnectedness, it is important to measure the level of financial stress in regional economies and detect the areas within the financial system that drive the stress levels. Pre-emptive policy measures could be taken in a more timely manner once signs of escalating financial stress levels are spotted. This study seeks to construct a Financial Stress Index (FSI) that can be used as a surveillance tool to assess signs of financial stress for regional economies with sufficient high-frequency financial sector data, as well as an aggregated FSI for the region. In the construction of the FSI, a number of indicators that proxy different areas of stress in the financial sector, i.e. the stock market, sovereign and corporate debt market, money and interbank market, and the foreign exchange market are evaluated for China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, and Thailand.

The results from the study suggest that the FSI for each economy is able to identify stress originating from global, regional and domestic events well. The FSIs at the country and regional levels are able to capture the high stress level during the Global Financial Crisis (GFC), post-GFC, such as the Euro Crisis, the taper tantrum, FX pressure from changes in China’s central parity mechanism, and more recently, growing risk aversion in emerging markets.

Authors: Anthony Tan, Chaipat Poonpatpibul, Chiang Yong (Edmond) Choo, Simon Liu