Predicting Financial Stress Events: A Signal Extraction Approach

Ian Christensen () and Fuchun Li

Staff Working Papers from Bank of Canada

Abstract: The objective of this paper is to propose an early warning system that can predict the likelihood of the occurrence of financial stress events within a given period of time. To achieve this goal, the signal extraction approach proposed by Kaminsky, Lizondo and Reinhart (1998) is used to monitor the evolution of a number of economic indicators that tend to exhibit an unusual behaviour in the periods preceding a financial stress event. Based on the individual indicators, we propose three different composite indicators, the summed composite indicator, the extreme composite indicator and the weighted composite indicator. In-sample forecasting results indicate that the three composite indicators are useful tools for predicting financial stress events. The out-of-sample forecasting results suggest that for most countries, including Canada, the weighted composite indicator performs better than the two others across all criteria considered.

Keywords: Econometric and statistical methods; Financial stability (search for similar items in EconPapers)
JEL-codes: C14 C4 E37 E47 F36 F37 G01 G17 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2014
New Economics Papers: this item is included in nep-for, nep-mac and nep-rmg
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Citations: View citations in EconPapers (39)

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Journal Article: Predicting financial stress events: A signal extraction approach (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:14-37

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