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Constructing a financial fragility index for emerging countries

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  • Sensoy, Ahmet
  • Ozturk, Kevser
  • Hacihasanoglu, Erk

Abstract

This article proposes a novel framework to construct a financial fragility index (FIX) of an emerging country from five main variables by combining the methods of principal component analysis and dynamic conditional correlations. The main contribution of the FIX is the time-varying weighting scheme of the variables and it is demonstrated for a leading emerging market, Turkey. A comparison with the classic principal component approach on forecasting economic activity-expectations and a policy making application are presented.

Suggested Citation

  • Sensoy, Ahmet & Ozturk, Kevser & Hacihasanoglu, Erk, 2014. "Constructing a financial fragility index for emerging countries," Finance Research Letters, Elsevier, vol. 11(4), pages 410-419.
    • Handle: RePEc:eee:finlet:v:11:y:2014:i:4:p:410-419
    DOI: 10.1016/j.frl.2014.07.007
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    Cited by:

    1. Keffala, Mohamed Rochdi, 2015. "How using derivatives affects bank stability in emerging countries? Evidence from the recent financial crisis," Research in International Business and Finance, Elsevier, vol. 35(C), pages 75-87.
    2. Ellis, Scott & Sharma, Satish & Brzeszczyński, Janusz, 2022. "Systemic risk measures and regulatory challenges," Journal of Financial Stability, Elsevier, vol. 61(C).
    3. Wang, Zihe & Li, Johnny Siu-Hang, 2016. "A DCC-GARCH multi-population mortality model and its applications to pricing catastrophic mortality bonds," Finance Research Letters, Elsevier, vol. 16(C), pages 103-111.
    4. Kutan, Ali M. & Muradoğlu, Yaz G., 2016. "Financial and real sector returns, IMF-related news, and the Asian crisis," Finance Research Letters, Elsevier, vol. 16(C), pages 28-37.
    5. Agnello, Luca & Castro, Vítor & Hammoudeh, Shawkat & Sousa, Ricardo M., 2020. "Global factors, uncertainty, weather conditions and energy prices: On the drivers of the duration of commodity price cycle phases," Energy Economics, Elsevier, vol. 90(C).
    6. Ferriani, Fabrizio & Gazzani, Andrea, 2022. "Financial condition indices for emerging market economies: Can Google help?," Economics Letters, Elsevier, vol. 216(C).
    7. Nguyen, Duc Khuong & Sensoy, Ahmet & Sousa, Ricardo M. & Salah Uddin, Gazi, 2020. "U.S. equity and commodity futures markets: Hedging or financialization?," Energy Economics, Elsevier, vol. 86(C).
    8. Sensoy, Ahmet & Omole, John, 2018. "Implied volatility indices: A review and extension in the Turkish case," International Review of Financial Analysis, Elsevier, vol. 60(C), pages 151-161.

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    More about this item

    Keywords

    Financial fragility; Emerging markets; Dynamic conditional correlation; Principal component analysis; MIDAS regression;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises

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