This study analysed the financial stress of the SAARC countries including Pakistan, India, Bangladesh and Sri Lanka. Through principal component analyses and through equal variance weight financial stress index has been constructed which showed the financial stress period in these countries successfully. The index which is constructed through equal variance weight method showed more volatility as compare to principal component analyses. Through index stress period can identified which is helpful for the monitory authorizes an d financial analysts to avoid the financial crises by making suitable policies. This study also find out the determinants of financial stress including global and domestic variables through Panel Least Square fixed effect method. Global variables were significantly impacting on the domestic financial stress. Which means that if any shock hit that will effect these countries. And there are few domestic variables like as decline in foreign exchange reserves will cause financial stress. By using the financial stress this study also analyzed the (business cycle) fluctuations in GDP per capita. Which showed that there is positive significant relationship between financial stress index and business cycle. This showed that the financial stress index can indicate the recession and boom also. When there is low stress the economic condition is good and if there is more stress then there is recession. Dynamic Panel Regression was estimated through dynamic fixed effect method. Supervisor:- Dr. Shujaat Farooq