Determinants of financial stress in emerging market economies: Are spatial effects important?

This study aims to analyse the determinants of financial stress and to show the impact of the spatial linkages between 13 emerging economies during 1996-2016. The 2007 Global Financial Crisis has once again showed that financial/economic turmoil of countries has negative effects on other economies. At this point, this study brings novelty to the existing literature by considering the effects of neighbour countries' macroeconomic variables on domestic financial stress and by focusing on financial stress interaction between emerging economies using spatial econometric methods. According to the estimation results, we find current account balance/GDP, economic growth, geopolitical risk and global risk are the most important determinants of financial stress. It is also observed that there is a strong interaction of financial stress among emerging market economies. While geographical linkage is the most important transmission channel of financial stress among those economies, financial and trade linkages also play an important role.