Constructing a financial stress index for Vietnam : an application of autoregressive conditional heteroskedastic models

This paper constructs an index to measure financial stress for Vietnam with monthly data from April 2007 to December 2016. Various measures of stress are selected based on literature and Vietnam’s practice. An important stress measure, the volatility of stock market, bond market, money market and banking sector, is estimated by variants of the general autoregressive conditional heteroskedasticity (GARCH) model. Individual stress variables are combined together to make an aggregate index using equal variance weighting scheme. The constructed index is a useful tool for policy makers to monitor the riskiness of domestic financial system as well as academics to conduct further research about financial crisis.