As the G-20 leaders meet in London, one graph should remind the representatives of these disparate countries of their shared interest in restoring the health of the financial systems of the developed countries.
- Banking sector: rolling 12-month covariance of the year-over-year percent change of a countryâ€™s banking sector equity index and its overall stock market index, divided by the rolling 12-month variance of the year-over-year percent change of the overall stock market index.
- TED spread: three-month LIBOR or commercial paper rate minus the government short term rate.
- Inverted term spread: government short term rate minus government long-term rate.
The emerging market FSI is constructed as a weighted average of the exchange market pressure index, sovereign spreads, the banking sector beta, stock returns, and time-varying stock return volatility.
The authors note that the pass through of financial stress from advanced countries to emerging markets is almost one-for-one. That being said:
there is significant cross-country variation. An empirical analysis of stress comovement shows that stronger financial (i.e., banking, portfolio, and FDI) linkages are associated with a higher stress pass-through from advanced to emerging economies. During the most recent crisis, bank lending linkages have been the main driver of stress transmission.
This characterization is obtained via a two-step procedure, as in Forbes and Chinn (2004). In the first step, the coefficient relating emerging market stress to advanced is obtained. These coefficients are then treated as data, in a regression on determinants such as FDI and banking linkages.
Another way of seeing the importance of, for instance, bank linkages is by inspecting the emerging market liabilities to advanced country banks:
Figure from Box 2 IMF.In my view, large liabilities are important to the extent that bank deleveraging implies a long drawn out curtailment of credit to emerging markets. The IMF analysis observes:
Evidence from past episodes of systemic banking stress in advanced economies (Latin American debt crisis of the early 1980s and the Japanese banking crisis of the 1990s) implies that the decline in capital flows may be sizeable and drawn out. Given their large exposure, emerging European economies might be heavily affected, although EU membership offers some protection.
The complete analysis will come out in the next WEO.
* Full Disclosure: I was a consultant on this forthcoming chapter.
33 Responses to “Stress”
Could you please provide me monthly data on advance economy FSI.
The thing i like about your blog is that you always post direct to the point info.~,~.~
RSS Feeds on your blog sometimes does not work.’”.”~
Very well said, your blog says it all about that particular topic.~,.-:
You can also put a chatbox on your blog for more interactivity among readers.,~`”"
I bookmared your site a couple of days ago coz your blog impresses me.’*~;’
I just love to read new topics from you blog.:’,-*
Man that was very entertaining and at the same time informative..*”:’
I love to visit your web-blog, the themes are nice.:::–
RSS Feeds on your blog sometimes does not work.~.;.:
I really love the way you discuss this kind of topic.’,.`:
I would really like you to become a guest poster on my blog.`*”::
Your blog would increase in ranking if you post more often.’`*`*
Sometimes your blog is loading slowly, better find a better host..;~,`
Sometimes your blog is loading slowly, better find a better host.`~`’;
You can increase your blog visitors by having a fan page on facebook.-~”,*
You seem to be very professional in the way you write.”.,,*
Wow, you seem to be very knowledgable about this kind of topics.`-;-”
I see that you are using WordPress on your blog, wordpress is the best.*`-:-
You seem to be very professional in the way you write.”:.`.
I always visit your blog everyday to read new topics..`”:.
Hi, do you have a facebook fan page for your blog?,*,~-
Last month, when i visited your blog i got an error on the mysql server of yours..**-*
Sometimes, blogging is a bit tiresome specially if you need to update more topics.;-*.”
My friend first found your blog on Google and she referred your blog to me.’,.”-
Sometimes your blog is loading slowly, better find a better host.;-.’”
I love blogging and i can say that you also love blogging..’;;`
Your blog never ceases to amaze me, it is very well written and organized.;,;.-
Thanks for the great post on your blog, it really gives me an insight on this topic.~,~.*
RSS Feeds on your blog sometimes does not work.;`;”*
I always visit new blog everyday and i found your blog.;`.~,
Judging by the way you write, you seem like a professional writer.~~;,”
Your blog is one of a kind, i love the way you organize the topics.*,;.: