Are critical slowing down indicators useful to detect financial crises?

Hayette Gatfaoui, Isabelle Nagot () and Philippe de Peretti ()
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Isabelle Nagot: Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.univ-paris1.fr
Philippe de Peretti: Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.univ-paris1.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: In this article, we consider financial markets as complex dynamical systems, and check whether the critical slowing down indicators can be used as early warning signals to detect a phase transition. Using various rolling windows, we analyze the evolution of three indicators: i) First-order autocorrelation, ii) Variance, and iii) Skewness. Using daily data for ten European stock exchanges plus the United States, and focusing on the Global Financial Crisis, our results are mitigated and depend both on the series used and the indicator. Using the main (log) indices, critical slowing down indicators seem weak to predict to Global Financial Crisis. Using cumulative returns, for almost all countries an increase in variance and skewness does preceed the crisis. However, first-order autocorrelations of both log-indices and cumulative returns do not provide any useful information about the Global Financial Crisis. Thus, only some of the reported critical slowing down indicators may have informational content, and could be used as early warnings

Keywords: Global Financial Crisis; Critical Slowing Down; Complex Dynamical System; Phase Transition (search for similar items in EconPapers)
JEL-codes: C18 C52 G17 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2016-06
New Economics Papers: this item is included in nep-eec and nep-ger
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Are critical slowing down indicators useful to detect financial crises? (2016)
Working Paper: Are Critical Slowing Down Indicators Useful to Detect Financial Crises? (2016)
Working Paper: Are critical slowing down indicators useful to detect financial crises? (2016)
Working Paper: Are Critical Slowing Down Indicators Useful to Detect Financial Crises? (2016)
Working Paper: Are critical slowing down indicators useful to detect financial crises? (2016)
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