BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 2/2011:
Macro-financial vulnerabilities and future financial stress - Assessing systemic risks and predicting systemic events
Marco Lo Duca ()
and Tuomas Peltonen
Abstract: This paper develops a framework for assessing systemic
risks and for predicting (out-of-sample) systemic events, i.e. periods of
extreme financial instability with potential real costs. We test the
ability of a wide range of “stand alone” and composite indicators in
predicting systemic events and evaluate them by taking into account policy
makers’ preferences between false alarms and missing signals. Our results
highlight the importance of considering jointly various indicators in a
multivariate framework. We find that taking into account jointly domestic
and global macro-financial vulnerabilities greatly improves the performance
of discrete choice models in forecasting systemic events. Our framework
shows a good out-of-sample performance in predicting the last financial
crisis. Finally, our model would have issued an early warning signal for
the United States in 2006Q2, 5 quarters before the emergence of money
markets tensions in August 2007.
Keywords: early warning indicators; asset price booms and busts; financial stress; macro-prudential policies; (follow links to similar papers)
JEL-Codes: E44; E58; F01; F37; G01; (follow links to similar papers)
46 pages, April 5, 2011
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