Assessing the impacts of financial stress index of developed countries on the exchange market pressure index of emerging countries

Abstract

This study investigates the effects of the financial stress index (FSI) of developed countries on the exchange market pressure index (EMPI) of Brazil, China, Mexico, Russia and South Korea using nonlinear vector autoregression (VAR) model and quantile-based analysis. It was found by the nonlinear VAR that increases/decreases in the FSI of developed countries will increase/decrease the EMPI in each emerging country; on the other hand, allowing the role of regime changes, quantile regression model revealed that a raise in the FSI of developed countries may cause an increase in the EMPI of Brazil, China, Mexico, Russia and South Korea during their high-EMP periods. The effects of FSI depletion on the EMPI were found for lower EMP regimes, and it was suggested that Mexico and South Korea would be affected positively by the fall in the FSI of developed countries. The quantile slope equality test also verified that the effects of the FSI on the EMPI will vary under low/medium/high-EMP regimes and will be asymmetric.