The U.S financial crises of 2008 highlighted the role of a depressed financial system in causing an economic downturn. This pioneer empirical study develops a financial stress index for the Pakistan economy during 2000-2013. We use key variables that capture unique aspect of stress in the financial system. Principal component analysis technique is used to aggregate the components to a single index. Empirical analysis reveals that banking sector and stock market volatility are the leading contributors to financial stress in Pakistan. The developed financial stress index is then used to trace...