Macro-financial vulnerabilities and future financial stress: Assessing systemic risks and predicting systemic events

Marco Lo Luca and Tuomas Peltonen

No 2/2011, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

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 f preferences between false alarms and missing signals. Our results highlight the importance of considering jointly various indicators in a multiva-riate framework. We find that taking into account jointly domestic and global macro-financial vul-nerabilities 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 cri-sis. 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: Avaisanat: Early warning indicators; asset price booms and busts; financial stress; macro-prudential policies (search for similar items in EconPapers)
JEL-codes: E44 E58 F01 F37 G01 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofitp:bdp2011_002

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