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Mapping the state of financial stability

Peter Sarlin and Tuomas Peltonen ()

No 18/2011, BOFIT Discussion Papers from Bank of Finland, Institute for Economies in Transition

Abstract: The paper uses the Self-Organizing Map for mapping the state of financial stability and visualizing the sources of systemic risks on a two-dimensional plane as well as for predicting systemic financial crises. The Self-Organizing Financial Stability Map (SOFSM) enables a two-dimensional representation of a multidimensional financial stability space and thus allows disentangling the individual sources impacting on systemic risks. The SOFSM can be used to monitor macro-financial vulnerabilities by locating a country in the financial stability cycle: being it either in the pre-crisis, crisis, post-crisis or tranquil state. In addition, the SOFSM performs better than or equally well as a logit model in classifying in-sample data and predicting out-of-sample the global financial crisis that started in 2007. Model robustness is tested by varying the thresholds of the models, the policymaker's preferences, and the forecasting horizon.

Date: 2011-08-03
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Published in Published in Journal of International Financial Markets, Institutions & Money, Volume 26, October 2013, Pages 46–76

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