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Forecasting the fragility of the banking and insurance sectors

Kerstin Bernoth () and Andreas Pick

Journal of Banking & Finance, 2011, vol. 35, issue 4, 807-818

Abstract: Linkages between banks and insurance companies are important when forecasting the fragility of the banking and insurance sectors. We propose a novel empirical framework that allows us to estimate unobserved linkages in panel data sets that contain observed regressors. We find that taking unobserved common factors into account reduces the root mean square forecasts error of firm specific forecasts by up to 9%, of system forecasts by up to 14%, and by up to 39% for systemic forecasts of more distressed firms relative to a model based on observed variables only. Estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period.

Keywords: Financial; stability; Financial; linkages; Banking; Insurances; Unobserved; common; factors (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: Forecasting the Fragility of the Banking and Insurance Sector (2009) Downloads
Working Paper: Forecasting the fragility of the banking and insurance sector (2009) Downloads
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