The Financial Risk Meter (FRM) for Kuwait: A Tail-Event Perspective on Systemic Risk and Economic Forecasting

This study develops and applies the Financial Risk Meter (FRM) for Kuwait, a novel measure of systemic risk tailored for a commodity-dependent emerging economy. Using Lasso quantile regression, the FRM captures tail-event co-movements among key financial institutions, providing a robust indicator of systemic stress. This paper makes three primary contributions. First, it provides the first application of the FRM framework to an oil-exporting economy, identifying the distinct channels through which global financial shocks and commodity price volatility create systemic risk. Second, it quantitatively demonstrates the FRM’s superior performance in tracking financial stress compared to the benchmark Conditional Value-at-Risk (CoVaR) model. Third, it identifies the specific drivers of systemic risk in Kuwait, offering actionable insights for policymakers. Our findings show that the FRM effectively pinpoints periods of high financial distress, aligns with global risk indicators, and can enhance recession forecasting. By providing a clear and timely measure of systemic risk, this study offers a valuable tool for regulators to bolster financial stability and advance sustainable economic development in Kuwait and other resource-dependent nations.