Dear all,
Please I need assistance on the suggestive indicators for composing "financial stability index" using principal component analysis (PCA). I read some papers but the indicators are not unanimous across researchers.
Some authors use risk and returns indicators (such as net interest margin, return on assets, return on equity, stock price volatility, stock market capitalisation, zscore etc) while some use measures of financial stability and depth (such as domestic credit to the private sector, financial system deposits, liquid liabilities, broad money etc).
So which category of indicators is more applicable? And is the index appropriately called "stability" or "instability" index, because the literature is also conflicting on that one too.
All contributions will be immensely appreciated....gracias!
Financial Stability Index itself works as a benchmark, each industry may have a different threshold for it. Like the indicators you mentioned, some are mirco, some macro. So some are more useful at the organizational level and the others at the country level. Since the Index itself is actually analyzing the financial health of the organization, with a mix of indicators, it is important to understand what are your target areas, data and sample. Similarly Macro-prudential analysis includes the FSI, and adds more macro level indicators, like GDP, growth, compliance, etc
Thanks a lot, Asma!
My scope is on Sub-Saharan Africa from 1980-2016, so I will likely use the macro-indicators since data from 1980 to 1995 is not available for virtually all the countries. But is it right to call it "financial stability index" or "financial instability index"?
Thank you.
You're welcome Ngozi! Well, since the bench-marking is based on a FSI, having a research outcome through your study which qualifies to be called a Financial Instability Index could further enhance the literature and make your research pretty strong.
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