IDEAS home Printed from https://ideas.repec.org/a/spr/apjors/v9y2025i1d10.1007_s41685-024-00362-6.html
   My bibliography  Save this article

Measuring the financial stability sentiments and evaluating their impacts on financial soundness, financial stability, and the macroeconomy of Pakistan

Author

Listed:
  • Ateeb Akhter Shah Syed

    (Institute of Business Administration)

  • Kevin Haeseung Lee

    (Department of Statistics, Western Michigan University)

  • Mohsin Waheed

    (I.I. Chundrigar Road)

  • Sarah Saleh

    (I.I. Chundrigar Road)

Abstract

This paper measures the Financial Stability Sentiments Index (FSSI) for the economy of Pakistan, an interesting country case due to its resilient banking sector. We used a Natural Language Processing technique to quantify these sentiments from annual financial stability review reports published by the State Bank of Pakistan, central bank of Pakistan. The index captured events of high and low financial stress in Pakistan, such as the Global Financial Crisis and recent tightening by the Federal Reserve. Regarding the information content of our index, it serves as a leading indicator for selected indicators of financial soundness in Pakistan. Further, asymmetric analysis of the impact of financial stability sentiments on financial stability showed that improvements in the FSSI lead to a higher distance-to-default for two sets of diverse banking institutions in Pakistan, indicating improved financial stability as bank assets far outweigh their obligations. Finally, the index shows an intuitive and significant impact on selected financial soundness indicators as well as the real macroeconomic variables in Pakistan.

Suggested Citation

  • Ateeb Akhter Shah Syed & Kevin Haeseung Lee & Mohsin Waheed & Sarah Saleh, 2025. "Measuring the financial stability sentiments and evaluating their impacts on financial soundness, financial stability, and the macroeconomy of Pakistan," Asia-Pacific Journal of Regional Science, Springer, vol. 9(1), pages 27-56, March.
    • Handle: RePEc:spr:apjors:v:9:y:2025:i:1:d:10.1007_s41685-024-00362-6
    DOI: 10.1007/s41685-024-00362-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s41685-024-00362-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s41685-024-00362-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lorraine Rupande & Hilary Tinotenda Muguto & Paul-Francois Muzindutsi, 2019. "Investor sentiment and stock return volatility: Evidence from the Johannesburg Stock Exchange," Cogent Economics & Finance, Taylor & Francis Journals, vol. 7(1), pages 1600233-160, January.
    2. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
    3. van Eyden, Reneé & Gupta, Rangan & Nielsen, Joshua & Bouri, Elie, 2023. "Investor sentiment and multi-scale positive and negative stock market bubbles in a panel of G7 countries," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    5. Abuzayed, Bana & Al-Fayoumi, Nedal & Molyneux, Phil, 2018. "Diversification and bank stability in the GCC," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 57(C), pages 17-43.
    6. Kurowski, Łukasz & Smaga, Paweł, 2023. "Analysing financial stability reports as crisis predictors with the use of text-mining," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    7. Oosterloo, Sander & de Haan, Jakob & Jong-A-Pin, Richard, 2007. "Financial stability reviews: A first empirical analysis," Journal of Financial Stability, Elsevier, vol. 2(4), pages 337-355, March.
    8. Ricardo Correa & Keshav Garud & Juan M Londono & Nathan Mislang, 2021. "Sentiment in Central Banks’ Financial Stability Reports," Review of Finance, European Finance Association, vol. 25(1), pages 85-120.
    9. Aviral Kumar Tiwari & Deven Bathia & Elie Bouri & Rangan Gupta, 2021. "Investor Sentiment Connectedness: Evidence From Linear And Nonlinear Causality Approaches," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-29, December.
    10. Benjamin Born & Michael Ehrmann & Marcel Fratzscher, 2014. "Central Bank Communication on Financial Stability," Economic Journal, Royal Economic Society, vol. 124(577), pages 701-734, June.
    11. Sajjad Zaheer & Muhammad Farooq Arby, 2023. "Effects of Monetary Policy on Stability and Asset Quality of the Banks in Pakistan," SBP Working Paper Series 113, State Bank of Pakistan, Research Department.
    12. Cubillas, Elena & Ferrer, Elena & Suárez, Nuria, 2021. "Does investor sentiment affect bank stability? International evidence from lending behavior," Journal of International Money and Finance, Elsevier, vol. 113(C).
    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. Kurowski, Łukasz & Smaga, Paweł, 2023. "Analysing financial stability reports as crisis predictors with the use of text-mining," The Journal of Economic Asymmetries, Elsevier, vol. 28(C).
    2. Cheng Hoon Lim & Alexander D. Klemm & Sumiko Ogawa & Marco Pani & Claudio Visconti, 2019. "Financial Stability Reports in Latin America and the Caribbean," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 1(11), pages 46-78, January.
    3. Bierens, H.J. & Broersma, L., 1991. "The relation between unemployment and interest rate : some international evidence," Serie Research Memoranda 0112, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
    4. Xu, Haifeng & Hamori, Shigeyuki, 2012. "Dynamic linkages of stock prices between the BRICs and the United States: Effects of the 2008–09 financial crisis," Journal of Asian Economics, Elsevier, vol. 23(4), pages 344-352.
    5. Webber, A., 1999. "Newton's Gravity Law and Import Prices in the Asia Pacific," Economics Working Papers WP99-12, School of Economics, University of Wollongong, NSW, Australia.
    6. Pawel Milobedzki, 2010. "The Term Structure of the Polish Interbank Rates. A Note on the Symmetry of their Reversion to the Mean," Dynamic Econometric Models, Uniwersytet Mikolaja Kopernika, vol. 10, pages 81-95.
    7. M. T. Alguacil & V. Orts, 2003. "Inward Foreign Direct Investment and Imports in Spain," International Economic Journal, Taylor & Francis Journals, vol. 17(3), pages 19-38.
    8. Vicente Meneu & Hipòlit Torró, 2003. "Asymmetric covariance in spot‐futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(11), pages 1019-1046, November.
    9. Dimitrios Kanelis & Pierre L. Siklos, 2025. "The ECB press conference statement: deriving a new sentiment indicator for the euro area," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 30(1), pages 652-664, January.
    10. Sayef Bakari & Sofien Tiba & Nissar Fakraoui, 2019. "Does Domestic Investment Contribute To Economic Growth In Uruguay? What Did The Empirical Facts Say?," Journal of Smart Economic Growth, , vol. 4(2), pages 53-69, September.
    11. Morgenroth, Edgar & FitzGerald, John & FitzGerald, John, 2006. "Summary and Conclusions," Book Chapters, in: Morgenroth, Edgar (ed.),Ex-Ante Evaluation of the Investment Priorities for the National Development Plan 2007-2013, chapter 24, pages 317-333, Economic and Social Research Institute (ESRI).
      • Baker, Terence J. & FitzGerald, John & Honohan, Patrick & FitzGerald, John & Honohan, Patrick, 1996. "Summary and Conclusions," Book Chapters, in: Baker, Terence J. (ed.),Economic Implications for Ireland of EMU, chapter 12, pages 339-352, Economic and Social Research Institute (ESRI).
    12. M. Hakan Berument & Zulal Denaux & Yeliz Yalcin, 2012. "Turkish monetary policy and components of aggregate demand: a VAR analysis with sign restrictions model," Applied Economics, Taylor & Francis Journals, vol. 44(36), pages 4787-4798, December.
    13. Eva Liljeblom & Sabur Mollah & Patrik Rotter, 2015. "Do dividends signal future earnings in the Nordic stock markets?," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 493-511, April.
    14. Yuksel ILTAS & Umit BULUT, 2016. "The relationships among the returns of investment instruments: a vector autoregressive approach for Turkey," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(609), W), pages 273-280, Winter.
    15. Johannes W. Fedderke, 2022. "Identifying steady‐state growth and inflation in the South African economy, 1960–2020," South African Journal of Economics, Economic Society of South Africa, vol. 90(3), pages 279-300, September.
    16. Xu, T.T., 2012. "The role of credit in international business cycles," Cambridge Working Papers in Economics 1202, Faculty of Economics, University of Cambridge.
    17. Baker, Terence J. & FitzGerald, John & Honohan, Patrick & FitzGerald, John & Honohan, Patrick, 1996. "Introduction," Book Chapters, in: Baker, Terence J. (ed.),Economic Implications for Ireland of EMU, chapter 1, pages 1-9, Economic and Social Research Institute (ESRI).
    18. J. Mark MUNOZ & Al NAQVI, 2017. "Artificial Intelligence and Urbanization: The Rise of the Elysium City," Journal of Economics and Political Economy, KSP Journals, vol. 4(1), pages 1-13, March.
    19. Erdal Demirhan & Banu Demirhan, 2015. "The Dynamic Effect of ExchangeRate Volatility on Turkish Exports: Parsimonious Error-Correction Model Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(4), pages 429-451, September.
    20. Jean Louis EKOMANE, 2017. "Monetary policy transmission: Does the credit channel perform in Cameroon?," Turkish Economic Review, KSP Journals, vol. 4(4), pages 369-377, December.

    More about this item

    Keywords

    Financial stability sentiments; FSRs; Natural language processing; VAR; Lead–lag;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    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:spr:apjors:v:9:y:2025:i:1:d:10.1007_s41685-024-00362-6. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.