Assessing the Impact of Financial Stress Shock Volatility in the USA on the Exchange Rates of Emerging Economies

Abstract

This study examines the influence of the USA's Financial Stress Index (FSI) on the Exchange Market Pressure Index (EMPI) of ASEAN countries, focusing on how both positive and negative FSI shocks affect exchange rates under different market conditions.
Global financial stress causes currency volatility, which threatens investor confidence, trade competitiveness, and economic stability in emerging economies. The research uses a non-linear Vector Autoregressive (VAR) model to analyze the asymmetric relationship between FSI shocks and EMPI in Indonesia, Malaysia, Singapore, and Thailand, categorizing the effects into low, normal, and high exchange market pressure regimes. The study finds that both positive and negative FSI shocks affect the exchange rates of ASEAN countries, with high-pressure regimes amplifying the risks of currency crises. Policymakers should focus on understanding financial stress transmission, strengthening domestic financial systems, and developing proactive risk management strategies to mitigate the adverse effects of global financial volatility.