Predicting financial stress events: A signal extraction approach

Ian Christensen and Fuchun Li

Journal of Financial Stability, 2014, vol. 14, issue C, 54-65

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 et al. (1998) is used to monitor the evolution of a number of economic indicators that tend to exhibit unusual behavior in the periods preceding a financial stress event. Based on the individual indicators from 13 OECD countries, we propose three different composite indicators, the summed composite indicator, the extreme composite indicator and the weighted composite indicator. The in-sample forecasting results for the 13 OECD countries indicate that the three composite indicators are useful tools for predicting financial stress events, while none of them outperforms the others across all the criteria considered. The out-of-sample forecasting results suggest that for most of the 13 OECD countries, including Canada, the United Kingdom and the United States, the weighted composite indicator performs better than the two others across all the criteria considered.

Keywords: Cut-off probability; Early warning system; Financial crisis; Financial stress event; Signal extraction approach (search for similar items in EconPapers)
JEL-codes: C12 C14 G01 G17 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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Working Paper: Predicting Financial Stress Events: A Signal Extraction Approach (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:14:y:2014:i:c:p:54-65

DOI: 10.1016/j.jfs.2014.08.005

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