Measuring Global Financial Market Stresses

Groen, Jan J. J.; Nattinger, Michael; Noble, Adam I.

Report

Measuring Global Financial Market Stresses

Abstract: We propose measures of ﬁnancial market stress for forty-six countries and regions across the world. Our measures indicate that worldwide ﬁnancial market stresses rose signiﬁcantly in March following the widespread economic shutdowns in the wake of the COVID-19 pandemic. However, hardly anywhere in the world did these March peaks in ﬁnancial stresses reach those seen during the trough of the 2007-09 Global Financial Crisis. Since March, ﬁnancial market conditions normalized rapidly with ﬁnancial market stresses around average levels. We also show that our ﬁnancial stress measures have predictive power for the near-term economic outlook across most parts of the world, with the exception of China. A structural Bayesian VAR analysis indicates that historically, ﬁnancial stress shocks, irrespective of the source of the shock, have signiﬁcant impact on global economic activity, but in particular that emerging market economies are usually hit more severely than advanced economies.

Keywords: financial markets; financial stress indices; emerging markets; advanced economies; SVAR;

JEL Classification: C32; C51; E44; F30; F65;