Predicting Financial Stress Events: A Signal Extraction Approach
Ian Christensen () and
Staff Working Papers from Bank of Canada
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, Lizondo and Reinhart (1998) is used to monitor the evolution of a number of economic indicators that tend to exhibit an unusual behaviour in the periods preceding a financial stress event. Based on the individual indicators, we propose three different composite indicators, the summed composite indicator, the extreme composite indicator and the weighted composite indicator. In-sample forecasting results indicate that the three composite indicators are useful tools for predicting financial stress events. The out-of-sample forecasting results suggest that for most countries, including Canada, the weighted composite indicator performs better than the two others across all criteria considered.
Keywords: Econometric and statistical methods; Financial stability (search for similar items in EconPapers)
JEL-codes: C14 C4 E37 E47 F36 F37 G01 G17 (search for similar items in EconPapers)
Pages: 49 pages
New Economics Papers: this item is included in nep-for, nep-mac and nep-rmg
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Journal Article: Predicting financial stress events: A signal extraction approach (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:14-37
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