Review Paper on Composite Leading Index Creation for Forecasting the Bangladeshi Financial Sector

Maria Afreen
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Maria Afreen: University Malaysia Sarawak, Faculty of Economics and Business

International Journal of Finance & Banking Studies, 2020, vol. 9, issue 4, 23-32

Abstract: In perspective of the economic vulnerability faced by banks in financial sector, this study mirrors the methodology used by Shumway (2001) –the dynamic hazard model that is able to forecast systemic risk in financial market arena. Here, the terminology followed is based on the CAMELS framework variables: capital adequacy, asset, management, earnings, liquidity and sensitivity to market risk. The objective of this study is to construct a macroprudential indicator (MPI) for the case of Bangladeshi financial market. The result will then be tested for robustness with macro-stress test. Lagged independent variables will be used in the simple hazard model to allow early prediction of MPI inthe year in which the crisis happens. The empirical findings can be used as a guideline for the Bangladesh Government and policy makers in accessing, examining and forecasting the health of the Bangladeshi financial system and formulate suitable financialsystem policies for control. MPI generates information about systemic risk allowing the detection of potential economic crises functioning as an early warning indicator. Government and policy makers will be able to make early preparation in cushioning anypotential crises by means of the MPI. Thus the impact of the crises could be minimized and eventually reduce its impact on the Bangladesh economy. The specific objectives are to assemble a novel MPI that is able to recommend early signals of financial market vulnerability, to identify the MPI turning points and establish a comprehensive reference chronology for Bangladeshi financial market and to evaluate the predictive performance of newly constructed MPI on characterizing Bangladeshi financial sector.

Keywords: Macro-prudential Cycle; Shumway Method; Dynamic Hazard Model; Financial Sector; Economic Crises (search for similar items in EconPapers)
Date: 2020
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