IDEAS home Printed from https://ideas.repec.org/a/ejn/ejssjr/v10y2022i1p25-36.html

How Does Financial Market Stress Respond to Shocks in Global Economic Activity and Exchange Rate Stability? A Structural VAR Approach

Author

Listed:
  • Baneng Naape

    (University of the Witwatersrand, South Africa)

  • Bekithemba Qeqe

    (University of Fort Hare, South Africa)

Abstract

The study examines the response of financial market stress to innovations in global economic activity and the exchange rate in emerging and advanced market economies during the period 2006Q1 and 2020Q4. This is achieved by means of time series econometric analysis. The impulse response function estimated through structural factorization indicates that financial market stress responds positively towards its own innovations and to innovations in global economic activity. In contrast, financial market stress responds negatively to a one standard deviation in the exchange rate in the long run albeit the response is neutral in the short run. The findings from the variance decomposition show that in advanced market economies, a larger fraction of the discrepancies in financial market stress are explained by its own innovations followed by innovations in global economic activity, whereas in emerging market economies, a larger proportion of the discrepancies in financial market stress are explained by its own innovations followed by innovations in the broad exchange rate. Given the findings, the study recommends strong coordination between monetary policy and fiscal policy to ensure that overall economic activity is optimized and maintained in the long run. Monetary authorities have a role to play in ensuring price and exchange rate stability while fiscal authorities have the tools to realize minimal budget deficits and optimal debt management.

Suggested Citation

  • Baneng Naape & Bekithemba Qeqe, 2022. "How Does Financial Market Stress Respond to Shocks in Global Economic Activity and Exchange Rate Stability? A Structural VAR Approach," Eurasian Journal of Social Sciences, Eurasian Publications, vol. 10(1), pages 25-36.
    • Handle: RePEc:ejn:ejssjr:v:10:y:2022:i:1:p:25-36
    as

    Download full text from publisher

    File URL: https://eurasianpublications.com/wp-content/uploads/2022/05/EJSS-10.1.3.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. van Roye, Björn, 2011. "Financial stress and economic activity in Germany and the Euro Area," Kiel Working Papers 1743, Kiel Institute for the World Economy.
    2. Ferrer, Román & Jammazi, Rania & Bolós, Vicente J. & Benítez, Rafael, 2018. "Interactions between financial stress and economic activity for the U.S.: A time- and frequency-varying analysis using wavelets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 492(C), pages 446-462.
    3. Alan M. Taylor, 2015. "Credit, Financial Stability, and the Macroeconomy," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 309-339, August.
    4. Sofiane Aboura & Bjoern van Roye, 2017. "Financial stress and economic dynamics: The case of France," International Economics, CEPII research center, issue 149, pages 57-73.
    5. Aboura, Sofiane & van Roye, Björn, 2013. "Financial stress and economic dynamics: An application to France," Kiel Working Papers 1834, Kiel Institute for the World Economy.
    6. Adam Gersl & Jaroslav Hermanek, 2007. "Financial Stability Indicators: Advantages and Disadvantages of their Use in the Assessment of Financial System Stability," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2006, chapter 0, pages 69-79, Czech National Bank, Research and Statistics Department.
    7. Fornaro, Luca, 2015. "Financial crises and exchange rate policy," Journal of International Economics, Elsevier, vol. 95(2), pages 202-215.
    8. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    9. McKinnon, Ronald I, 1988. "Monetary and Exchange Rate Policies for International Financial Stability: A Proposal," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 83-103, Winter.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Apostolakis, George N. & Floros, Christos & Gkillas, Konstantinos & Wohar, Mark, 2021. "Financial stress, economic policy uncertainty, and oil price uncertainty," Energy Economics, Elsevier, vol. 104(C).
    2. Begüm Yurteri Kösedağlı & A. Özlem Önder, 2021. "Determinants of financial stress in emerging market economies: Are spatial effects important?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4653-4669, July.
    3. Anca Mihaela COPACIU & Alexandra HOROBET, 2022. "Spillovers in the Presence of Financial Stress – An Application to Romania," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 29-43, April.
    4. Nadri, Kamran & Ebrahimi, Sajad & Fadaie, Abbas, 2018. "An Investigation of Co-Movement of Financial Stability Index with Macro-Prudential Indicator through Wavelet Analysis," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 13(2), pages 125-151, April.
    5. Kondoz, Mehmet & Kirikkaleli, Dervis & Athari, Seyed Alireza, 2021. "Time-frequency dependencies of financial and economic risks in South American countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 79(C), pages 170-181.
    6. Mikhail Stolbov & Maria Shchepeleva, 2021. "Macrofinancial linkages in Europe: Evidence from quantile local projections," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5557-5569, October.
    7. Alsamara, Mouyad & Mrabet, Zouhair & Jarallah, Shaif & Barkat, Karim, 2019. "The switching impact of financial stability and economic growth in Qatar: Evidence from an oil-rich country," The Quarterly Review of Economics and Finance, Elsevier, vol. 73(C), pages 205-216.
    8. Theshne Kisten, 2023. "Macro-financial implications of public debt in South Africa: The role of financial regimes," WIDER Working Paper Series wp-2023-76, World Institute for Development Economic Research (UNU-WIDER).
    9. repec:pra:mprapa:99376 is not listed on IDEAS
    10. Fu, Zheng & Chen, Zhiguo & Sharif, Arshian & Razi, Ummara, 2022. "The role of financial stress, oil, gold and natural gas prices on clean energy stocks: Global evidence from extreme quantile approach," Resources Policy, Elsevier, vol. 78(C).
    11. Tran, Thuy Nhung, 2022. "The Volatility of the Stock Market and Financial Cycle: GARCH Family Models," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(1), pages 151-168.
    12. repec:aen:journl:ej42-5-bashiri is not listed on IDEAS
    13. Tan, Sook-Rei & Li, Changtai & Yeap, Xiu Wei, 2022. "A time-varying copula approach for constructing a daily financial systemic stress index," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    14. Ashutosh Dash & Sangram Keshari Jena & Anirban Sengupta & Aviral Kumar Tiwari, 2026. "Structural Impact of the US Financial Stress on the Connectedness Between Asian Economies: Evidence From the Quantile Connectedness Approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 31(1), pages 674-704, January.
    15. Ozcelebi, Oguzhan, 2020. "Assessing the impacts of financial stress index of developed countries on the exchange market pressure index of emerging countries," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 288-302.
    16. Yingdong Wang & Wenzhi Xi, 2025. "Measurement and Early Warning of Systemic Financial Risk in China: Markov Switching Models," Computational Economics, Springer;Society for Computational Economics, vol. 66(6), pages 5083-5111, December.
    17. Chen, Guojin & Liu, Yanzhen & Zhang, Yu, 2020. "Can systemic risk measures predict economic shocks? Evidence from China," China Economic Review, Elsevier, vol. 64(C).
    18. Drenkovska, Marija & Lenarčič, Črt, 2025. "Financial markets stress indicator for Slovenia (FIMSIS)," MPRA Paper 125551, University Library of Munich, Germany.
    19. Mehmet Balcilar & Rangan Gupta & Theshne Kisten, 2021. "The impact of uncertainty shocks in South Africa: The role of financial regimes," Review of Financial Economics, John Wiley & Sons, vol. 39(4), pages 442-454, October.
    20. Layal MansourIshrakieh & Leila Dagher & Sadika El Hariri, 2020. "A financial stress index for a highly dollarized developing country : The case of Lebanon," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 20(2), pages 43-52.
    21. Mikhail Stolbov & Alexander Karminsky & Maria Shchepeleva, 2018. "Does Economic Policy Uncertainty Lead Systemic Risk? A Comparative Analysis of Selected European Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(3), pages 332-360, September.
    22. Tai-Hock Kuek & Chin-Hong Puah & M. Affendy Arip, 2020. "Financial Vulnerability and Economic Dynamics in Malaysia," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 55-73.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ejn:ejssjr:v:10:y:2022:i:1:p:25-36. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Esra Barakli (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.