Predicting Financial Vulnerability in Malaysia: Evidence From the Signals Approach

Abstract

This paper aims to investigate Malaysia’s vulnerability to a financial crisis. The methodology employed is an extension of the signals approach based on the original work of Kaminsky and Reinhart (1999). By studying the period from 2000M1 to 2016M9, we construct a financial vulnerability indicator (FVI) to measure the development of vulnerabilities in the Malaysian financial system. Our empirical findings unveil that the causes of crises are multidimensional. Notably, economic slowdown, decline in stock price and weak exports contain good predictive power in assessing financial vulnerability to a crisis. This study highlights the significance of internal and external macroeconomic conditions in determining a country’s vulnerability.

Macroeconomic Perspective on Constructing Financial Vulnerability Indicator in China

“…With the intensifying importance in monitoring the health of the financial system, Kuek et al (2019) and Arip et al (2019) developed the financial vulnerability indicator for the case of Malaysia using different approaches. The authors noted that early warning mechanisms are useful in forecasting financial vulnerabilities by acting as a leading indicator.…”

“…The authors noted that early warning mechanisms are useful in forecasting financial vulnerabilities by acting as a leading indicator. Kuek et al (2019) discovered that the causes of crises are multidimensional where internal and external macroeconomic conditions are critical and significant in defining a country's vulnerability. On the other hand, Monin (2019) revealed that a financial stress index (OFR FSI), developed by the Office of Financial Research, worked well in tracing systemic financial stress.…”