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Forecasting Financial Stress Indices in Korea: A Factor Model Approach

Hyeongwoo Kim (), Wen Shi and Hyun Hak Kim ()

No auwp2016-10, Auburn Economics Working Paper Series from Department of Economics, Auburn University

Abstract: We propose factor-based out-of-sample forecast models for Korea's financial stress index and its 4 sub-indices that are developed by the Bank of Korea. We extract latent common factors by employing the method of the principal components for a panel of 198 monthly frequency macroeconomic data after differencing them. We augment an autoregressive-type model of the financial stress index with estimated common factors to formulate out-of-sample forecasts of the index. Our models overall outperform both the stationary and the nonstationary benchmark models in forecasting the financial stress indices for up to 12-month forecast horizons. The first common factor that represents not only financial market but also real activity variables seems to play a dominantly important role in predicting the vulnerability in the financial markets in Korea.

Keywords: Financial Stress Index; Principal Component Analysis; PANIC; In-Sample Fit; Out-of-Sample Forecast; Diebold-Mariano-West Statistic (search for similar items in EconPapers)
JEL-codes: E44 E47 G01 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-for, nep-mac and nep-rmg
Date: 2016-09
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Related works:
Working Paper: Forecasting Financial Stress Indices in Korea: A Factor Model Approach (2019) Downloads
Working Paper: Forecasting Financial Stress Indices in Korea: A Factor Model Approach (2018) Downloads
Working Paper: Forecasting Financial Stress Indices in Korea: A Factor Model Approach (2018) Downloads
Working Paper: Forecasting Financial Stress Indices in Korea: A Factor Model Approach (2015) Downloads
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