Financial stress and spillover effects in emerging market econmoies

This study focuses on financial stress and its interaction in emerging market economies (EMEs). The 2007 Global Financial Crisis, as well as the crises experienced in the EMEs over the last 30 years, shows that any local financial/ economic turmoil can have negative effects on other economies through different channels. Under these circumstances, monitoring financial stress signals is important while conducting economic policies. From this point, firstly a financial stress index is constructed for Turkey, including numerous indicators from different sectors using three different aggregation methods. Although all indices successfully tracks periods of financial turmoil, the index constructed using variance equal weighting reveals the most successful results in terms of its relationship between economic activity. On the other hand, we used spatial econometric methods and different weight matrices to analyze the determinants of financial stress and to show the linkages between 16 selected EMEs in the period 1996-2016. According to the estimation results, current account balance/ GDP, economic growth and uncertainty in international markets are the most important determinants of financial stress. It is also observed that there is a strong interaction between financial stress of EMEs and the interaction reached its highest level during the Global Financial Crisis. While geographical distance has been the most important channel of interaction among countries, financial and commercial links have also played an important role in the transmission of financial stress among EMEs for the analysis period.