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An entropy-based early warning indicator for systemic risk

Monica Billio (), Roberto Casarin, Michele Costola and Andrea Pasqualini

Journal of International Financial Markets, Institutions and Money, 2016, vol. 45, issue C, 42-59

Abstract: We analyze the time evolution of systemic risk in Europe by using different entropy measures and construct a new early warning indicator for banking crises. The analysis is based on the cross-sectional distribution of systemic risk measures such as Marginal Expected Shortfall, Delta CoVaR and network connectedness. These measures are conceived at a single institution level for the financial industry in the Euro area and capture different features of the financial market during periods of stress. The empirical analysis shows the forecasting ability of entropy measures in predicting banking crises.

Keywords: Systemic risk measurement; Entropy measures; Bayesian inference; Early warning indicator; Banking crisis (search for similar items in EconPapers)
Date: 2016
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