A Financial Stress Index for South Africa: A Time-Varying Correlation Approach

Theshne Kisten

No 202011, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper develops a new index of financial market stress for South Africa (SAFSI) over the period 1995- 2017, that has the advantage of capturing the interconnectedness of financial markets as well as enabling each indicator to be assessed in terms of its systemic importance. The index represents a technical improvement over past measures as it is comprised of financial indicators that have been selected based on their ability to capture key periods of financial stress in the economy. These indicators are aggregated using information weights and time-varying cross-correlations between markets to form a comprehensive index, that accounts for the systemic dimension of financial indicators. In addition to capturing the benchmark episodes of financial stress in South Africa, the SAFSI successfully captures other global and idiosyncratic risks that affect the financial markets in the country. Furthermore, the SAFSI outperforms alternative measures that tend to overstate the intensity of financial stress, particularly during normal times. The disaggregation of the SAFSI into contributions emanating from each market sub-index (with information weights) and the overall contribution from the cross-correlations is quite useful for regulatory purposes, especially in terms of the financial stability surveillance functions carried out by macroprudential authorities.

Keywords: Financial stress; South Africa; AUROC; GARCH (search for similar items in EconPapers)
JEL-codes: B26 C58 F31 G01 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2020-01
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Related works:
Working Paper: A financial stress index for South Africa: A time-varying correlation approach (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:202011

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