Abstract
This article assesses the effect of financial stress caused by the great depression, 2008–2009, Oil crises of 2014–2015 accompanied by the sharp fall in the oil prices and the Arab Spring on the co-movements and volatility spillovers of aggregated Financial Stress Indices for eleven MENA countries. It is reveals that the extreme values of the FSIs are generally connected with well-known past financial stress episodes. We also found, for MENA Ex GCC countries, a weak interconnection between these countries while the GCC countries are more connected. Using a Vector auto-regression (VAR) estimation framework, we showed that the performance of the stock indices depends positively on its past and also, the stress index positively depends on his past delayed either by one or two periods. While, the study of impulse response functions shows that a positive shock on the financial stress index translates into a negative effect on stock market performance during the first year. This effect then disappears in slow motion before finding its long-term level.
Highlights
Drawing a financial stress index (FSI) became imperative due to repeated incidences of financial crises
The impulse response function makes it possible to measure the effect of a shock linked to the evolution of a stress index on the other indices
The FSIs are monthly indexes, which try to evaluate the state of instability in the financial system
Summary
Drawing a financial stress index (FSI) became imperative due to repeated incidences of financial crises. Financial crises are associated with a protracted recovery from other forms of recessions [1, 2]. An increasing number of studies have shifted concentrate to develop a financial stress indicator, which is a single composite indicator [3,4,5,6]. Balakrishnan et al [5] proposes FSI for developing countries, and consider the transmission channels of financial stress between advanced and developing countries. Domestic FSI of an emerging economy is pretended to be influenced by financial stress in developed economies as well as gross domestic product growth, interest rate, degree of financial and trade linkages and other domestic macroeconomics vulnerabilities [5]
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