Financial Stress Index and Economic Activity in South Africa: New Evidence

Abstract

The importance of a sound and stable financial system and by extension economic stability was brought to the fore by the global financial crisis (GFC). The economic and social costs of the GFC have renewed the commitment of stakeholders in the financial sector including central banks to develop instruments and methodologies that will be useful in monitoring financial stress within the financial system and the real economy. This study contributes to the growing literature by developing a financial stress indicator for the South African financial market. The financial stress indicator (FSI) is a single aggregate indicator that is constructed to reflect the systemic nature of financial instability and also to measure the vulnerability of the financial system to both internal and external shocks. Using the principal component analysis (PCA), the results show that financial stress can be identified by the financial stress indicator. Furthermore, using a recursive Vector Autoregression (VAR) model to estimate the impact of financial stress on output and investment, the result shows that financial stress has a negative impact on economic growth and investment, though not immediately. FSI is very useful for gauging the effectiveness of government measures to mitigate the impact of financial stress. Concerted effort to stimulate investment and domestic production by relevant stakeholders is necessary to mitigate the impact of financial stress. This will go a long way to alleviating the impact of the financial stress on industrial production, employment and the economy at large.

Evaluating the Impact of Financial Stability and Monetary Stability on Economic Growth: Evidence from an Emerging Economy

“…Similarly, recent studies by Duprey (2020); Ilesanmi and Tewari (2020);Ishrakieh, Dagher, and El Hariri (2020); Mundra and Bicchal (2021) show an economic decline and FS have a negative association between a country's GDP and economic development. Lastly, Hayat et al (2021) stated that Global economies have been impacted by the COVID-19 epidemic, particularly in light of the actions taken by the government regarding compulsory lockdowns and social segregation.…”

Systemic Financial Risk Forecasting: A Novel Approach with IGSA-RBFNN

“…Previous studies have their merits, but often overlook the importance of considering indicator variables, which are crucial factors [30]. Insufficient variable selection may lead to inaccurate economic performance assessment, while excessive variables can complicate data processing and potentially affect analysis results due to variable interactions.…”

“…The stock market provides a visual representation of the national economy. CSI 300 Index Yield (X31), CSI 300 Index Fluctuation Range (X32) and Stock Market Value/GDP (X33) are selected to measure equity market risk [30]. where X31 is measured using monthly stock market returns; X32 is based on a monthly stock price index; and X33 can effectively reflect stock market activity.…”

“…x update. The greedy selection mode of the differential evolution algorithm operation is adopted, as shown in Equation (30). When the fitness value of the new vector individual is better than the fitness value of the target vector individual, the newly updated individual can be accepted by the population, otherwise the individual of the previous generation will be retained in the next generation population.…”

Navigating Choppy Waters: Interplay between Financial Stress and Commodity Market Indices

“…It also adversely affects the economy, and can lead to a significant decline in consumer spending and investment, which slows down the rhythm of economic growth. It spreads among developed economies through financial, trade and economic channels, and may extend to emerging economies [17][18][19][20][21], affecting macroeconomic indicators [16,21,22] and causing currency market crises [23,24]. Financial stress can Disclaimer/Publisher's Note: The statements, opinions, and data contained in all publications are solely those of the individual author(s) and contributor(s) and not of MDPI and/or the editor(s).…”