Identifying an index of financial conditions for South Africa

Abstract

The global financial crisis that began in 2007-08 demonstrated how severe the impact of financial markets' stress on real economic activity can be. In the wake of the financial crisis policy-makers and decision-makers across the world identified the critical need for a better understanding of financial conditions, and more importantly, their impact on the real economy. To this end, we have constructed a financial conditions index (FCI) for the South African economy, to enable the gauging of financial conditions and to better understand the macro-financial linkages in the country. The FCI is constructed using monthly data over the period 1966 to 2011, and is based on a set of sixteen financial variables, which include variables that define the state of international financial markets, asset prices, interest rate spreads, stock market yields and volatility, bond market volatility and monetary aggregates. We explore different methodologies for constructing the FCI, and find that recursive principal components analysis (PCA) yields the best result. We furthermore investigate whether it is beneficial to purge the FCI of the real effects of inflation, economic growth and interest rates, and use the identified FCI in causality testing with three macroeconomic variables.

Macro-financial implications of public debt in South Africa: The role of financial regimes

“…To capture the state of financial markets in South Africa, the updated version of a recently constructed comprehensive financial stress index (called SAFSI) by Kisten (2021) is employed, which captures stress emanating from six major markets in South Africa: the equity market, credit market, foreign exchange market, money market, commodity market, and housing market. The novelty of SAFSI over past measures constructed for the economy-including those constructed by Gumata et al (2012), Kasaï and Naraidoo (2013), Thompson et al (2015), and Kabundi and Mbelu (2017)-lies in the selection and aggregation of financial indicators based on their incremental informational content rather than deemed relevance, thus achieving the best balance between parsimony and efficacy. 6 Source: author's construction.…”

The impact of uncertainty shocks in South Africa: The role of financial regimes

“…SAFSI comprises seventeen financial indicators emanating from six major markets in South Africa (i.e., credit market, equity market, money market, housing market, foreign exchange market, and commodity market). These indicators were aggregated based on information weights and time-varying cross-correlations between market segments, representing a technical improvement over past measures (see Gumata et al, 2012;Kabundi & Mbelu, 2017;Kasaï & Naraidoo, 2013;Thompson et al, 2015, that construct financial condition indexes (FCIs) for South Africa). 5 As such, SAFSI has the advantage of capturing the interconnectedness of financial markets, allowing indicators to be assessed in terms of their systemic importance.…”

A Tourism Financial Conditions Index for Tourism Finance

“…As stated by the Bank of Canada, the MCI is an index number calculated from a linear combination of two variables, namely the short-run interest rate and an exchange rate, that are deemed relevant for monetary policy. Based on the MCI, the FCI takes account of an extra factor, namely real asset prices, such as house prices and stock prices, to assess the conditions of financial markets (see Beaton [11]; and Thompson, Eyden, and Gupta, 2015, [12]). …”