Global Shocks and Local Fragilities: A Financial Stress Index Approach to Pakistan’s Monetary and Asset Market Dynamics
Economic stability in emerging market economies is increasingly shaped by the interplay between global financial integration, domestic monetary dynamics, and asset price fluctuations. Yet, early detection of financial market disruptions remains a persistent challenge. This study constructs a Financi...
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| Formato: | Artículo |
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2025
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| author | Yousfani, Kinza Iftikhar, Hasnain Rodrigues, Paulo Canas Torres Armas, Elías A. López Gonzales, Javier Linkolk |
| author_browse | Iftikhar, Hasnain López Gonzales, Javier Linkolk Rodrigues, Paulo Canas Torres Armas, Elías A. Yousfani, Kinza |
| author_facet | Yousfani, Kinza Iftikhar, Hasnain Rodrigues, Paulo Canas Torres Armas, Elías A. López Gonzales, Javier Linkolk |
| author_sort | Yousfani, Kinza |
| collection | Producción científica |
| description | Economic stability in emerging market economies is increasingly shaped by the interplay between global financial integration, domestic monetary dynamics, and asset price fluctuations. Yet, early detection of financial market disruptions remains a persistent challenge. This study constructs a Financial Stress Index (FSI) for Pakistan, utilizing monthly data from 2005 to 2024, to capture systemic stress in a globalized context. Using Principal Component Analysis (PCA), the FSI consolidates diverse indicators, including banking sector fragility, exchange market pressure, stock market volatility, money market spread, external debt exposure, and trade finance conditions, into a single, interpretable measure of financial instability. The index is externally validated through comparisons with the U.S. STLFSI4, the Global Economic Policy Uncertainty (EPU) Index, the Geopolitical Risk (GPR) Index, and the OECD Composite Leading Indicator (CLI). The results confirm that Pakistan’s FSI responds meaningfully to both global and domestic shocks. It successfully captures major stress episodes, including the 2008 global financial crisis, the COVID-19 pandemic, and politically driven local disruptions. A key understanding is the index’s ability to distinguish between sudden global contagion and gradually emerging domestic vulnerabilities. Empirical results show that banking sector risk, followed by trade finance constraints and exchange rate volatility, are the leading contributors to systemic stress. Granger causality analysis reveals that financial stress has a significant impact on macroeconomic performance, particularly in terms of GDP growth and trade flows. These findings emphasize the importance of monitoring sector-specific vulnerabilities in an open economy like Pakistan. The FSI offers strong potential as an early warning system to support policy design and strengthen economic resilience. Future modifications may include incorporating real-time market-based metrics indicators to better align the index with global stress patterns. |
| format | Article |
| id | oai:cris.upeu.edu.pe:20.500.15037/399 |
| institution | UPeU |
| language | English |
| publishDate | 2025 |
| publishDateRange | 2025 |
| publishDateSort | 2025 |
| record_format | dspace |
| spelling | oai:cris.upeu.edu.pe:20.500.15037/3992026-10-30T16:14:36ZGlobal Shocks and Local Fragilities: A Financial Stress Index Approach to Pakistan’s Monetary and Asset Market DynamicsYousfani, KinzaIftikhar, HasnainRodrigues, Paulo CanasTorres Armas, Elías A.López Gonzales, Javier Linkolkfinancial stress indexemerging marketsprincipal component analysismacroeconomic stabilityexchange market pressurebanking sector riskEconomic stability in emerging market economies is increasingly shaped by the interplay between global financial integration, domestic monetary dynamics, and asset price fluctuations. Yet, early detection of financial market disruptions remains a persistent challenge. This study constructs a Financial Stress Index (FSI) for Pakistan, utilizing monthly data from 2005 to 2024, to capture systemic stress in a globalized context. Using Principal Component Analysis (PCA), the FSI consolidates diverse indicators, including banking sector fragility, exchange market pressure, stock market volatility, money market spread, external debt exposure, and trade finance conditions, into a single, interpretable measure of financial instability. The index is externally validated through comparisons with the U.S. STLFSI4, the Global Economic Policy Uncertainty (EPU) Index, the Geopolitical Risk (GPR) Index, and the OECD Composite Leading Indicator (CLI). The results confirm that Pakistan’s FSI responds meaningfully to both global and domestic shocks. It successfully captures major stress episodes, including the 2008 global financial crisis, the COVID-19 pandemic, and politically driven local disruptions. A key understanding is the index’s ability to distinguish between sudden global contagion and gradually emerging domestic vulnerabilities. Empirical results show that banking sector risk, followed by trade finance constraints and exchange rate volatility, are the leading contributors to systemic stress. Granger causality analysis reveals that financial stress has a significant impact on macroeconomic performance, particularly in terms of GDP growth and trade flows. These findings emphasize the importance of monitoring sector-specific vulnerabilities in an open economy like Pakistan. The FSI offers strong potential as an early warning system to support policy design and strengthen economic resilience. Future modifications may include incorporating real-time market-based metrics indicators to better align the index with global stress patterns.Articlehttps://www.mdpi.com/2227-7099/13/8/243/pdf?version=1755607401https://doi.org/10.3390/economies1308024310.3390/economies13080243https://hdl.handle.net/20.500.15037/399W4413367176enEconomies2227-70992025-08-192026-06-13T08:12:42Z2026-06-13T08:12:42Z |
| spellingShingle | financial stress index emerging markets principal component analysis macroeconomic stability exchange market pressure banking sector risk Yousfani, Kinza Iftikhar, Hasnain Rodrigues, Paulo Canas Torres Armas, Elías A. López Gonzales, Javier Linkolk Global Shocks and Local Fragilities: A Financial Stress Index Approach to Pakistan’s Monetary and Asset Market Dynamics |
| title | Global Shocks and Local Fragilities: A Financial Stress Index Approach to Pakistan’s Monetary and Asset Market Dynamics |
| title_full | Global Shocks and Local Fragilities: A Financial Stress Index Approach to Pakistan’s Monetary and Asset Market Dynamics |
| title_fullStr | Global Shocks and Local Fragilities: A Financial Stress Index Approach to Pakistan’s Monetary and Asset Market Dynamics |
| title_full_unstemmed | Global Shocks and Local Fragilities: A Financial Stress Index Approach to Pakistan’s Monetary and Asset Market Dynamics |
| title_short | Global Shocks and Local Fragilities: A Financial Stress Index Approach to Pakistan’s Monetary and Asset Market Dynamics |
| title_sort | global shocks and local fragilities a financial stress index approach to pakistan s monetary and asset market dynamics |
| topic | financial stress index emerging markets principal component analysis macroeconomic stability exchange market pressure banking sector risk |
| topic_facet | financial stress index emerging markets principal component analysis macroeconomic stability exchange market pressure banking sector risk |
| url | https://www.mdpi.com/2227-7099/13/8/243/pdf?version=1755607401 https://doi.org/10.3390/economies13080243 https://hdl.handle.net/20.500.15037/399 |
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