A Bayesian Approach for a Stock Market Instability Index: Application to the Korean Stock Market

Recently, Kim and others (2009) proposed a stock market instability index ( SMII ) and a corresponding p-value using a nonparametric model fitted to a stable period. However, this SMII has failed to explain the 2008 global financial market crisis because its data-driven approach relies excessively on data from the stable period upon which it is based. To resolve this problem, this study considers the random walk model and combines it with the nonparametric model using a Bayesian approach. The integrated stock market instability index ( iSMII ) and its p-value are derived as a posterior expectation of the two models.