UC Santa Cruz

This dissertation studies topics of international finance, such as constructing of financial stress indices, exploring the relation between financial stress and economic activity, and employing a novel approach, which is called Receiver Operating Curve (ROC), to assess the performance of early warning indicators in terms of capturing crisis and non-crisis periods. Each chapter of the dissertation investigates one of these three topics.The first chapter focuses at creating three stress indices for Turkey by using the equal variance weighting method and principal component method, and portfolio theory method, namely, composite indicator of systemic stress which are the most widely used ones in the financial stress literature. After building the stress indices, by using the logit model, I calculate the effects of the indicators on the probability of a crisis occurring for financial institutions case. I find that while the CISS method captures systemic events better than the other two methods, the PCA method and EVW method appear to be able to capture non-systemic events. The second chapter empirically examines how economic activity reacts to the financial stress shocks depending on the stress regime in Turkey. By using quarterly data spans from 2002:Q1 - 2018:Q2, the effect of financial stress is examined using two threshold vector autoregression model (TVAR) for consumption, investment, real GDP, and unemployment by using financial stress index, credit growth, and domestic inflation rate as endogenous variables. The main result of this chapter is that financial stress is found to affect economic growth when the stress level is already high. The third and last chapter studies to evaluate the performance of the EWIs in terms of capturing banking crises by using ROC analysis. We evaluate the EWIs both stand-alone and jointly to compare performance in both situations.