Early Warning of Financial Stress Events: A Credit-Regime-Switching Approach

Fuchun Li and Hongyu Xiao

Staff Working Papers from Bank of Canada

Abstract: We propose an early warning model for predicting the likelihood of a financial stress event for a given future time, and examine whether credit plays an important role in the model as a non-linear propagator of shocks. This propagation takes the form of a threshold regression in which a regime change occurs if credit conditions cross a critical threshold. The in-sample and out-of-sample forecasting performances are encouraging. In particular, the out-of-sample forecasting results suggest that the model based on the credit-regime-switching approach outperforms the benchmark models based on a linear regression and signal extraction approach across all forecasting horizons and all criteria considered.

Keywords: Econometric and statistical methods; Financial stability (search for similar items in EconPapers)
JEL-codes: C12 C14 G01 G17 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016
New Economics Papers: this item is included in nep-for and nep-rmg
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:16-21

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