Designing a financial stress index and testing it in conditions of uncertainty(Case study: Financial market and stock exchange in Iran)

AbstractThe purpose of this study is to design a financial stress index to predict the occurrence of a financial crisis. In this study, a composite index has been designed to measure the Iranian financial system and the effects of financial turmoil in conditions of uncertainty in the financial markets and the Tehran Stock Exchange between 2009 and 2021. Since the shocks of variables were used in previous studies, in this study, three factors of currency turbulence, stock market index turmoil, and banking industry turbulence have been used to design and construct the financial stress index. This research is conducted in five steps based on the DCC-GHARCH approach and finally, based on the variables of financial institutions and the stock index, a predictive model for the financial stress index is presented. From the results, we find that all independent variables of the research have a positive and significant effect on the financial stress index, except for the coin price volatility index, which has a negative and significant effect. The value of the model determination coefficient is 0.8736, which indicates that the quality of the fitted model is desirable.