Beyond Bubbles: The role of asset prices in early-warning indicators

Esteban Gómez () and Sandra Rozo

No 4245, Borradores de Economia from Banco de la Republica

Abstract: Asset prices have recently become a common topic in economic debate. Nevertheless,much time has been spent in determining if they e®ectively exhibit a bubble component,and not in examining whether asset prices a®ectively contain relevant information concern-ing future market developments. This paper is a ¯rst e®ort in Colombia in this direction,aimed towards the construction of early ¡ warning indicators using ¯nancial and realvariables. Results show evidence to support that there is relevant information embeddedin these series, as all indicators (except the new housing price indicator) show a signif-icant deviation for the year(s) prior to the 98-99 crisis. Additionally, the exercises hereconducted show that the performance of asset price indicators is enhanced by includingcredit and investment. When the early-warning indicators are on, the role of the policymaker should be more active in the market; not necessarily in terms of altering interestrates, but in communicating with market agents, promoting portfolio and perspective (i.e.short and long-term) diversi¯cation and urging ¯nancial agents to make the best use ofthe tools that are available to them.

Keywords: Asset Price Bubbles; Early-Warning Indicators; Present Value Model; Finan-cial Crisis; Prudential Regulation. (search for similar items in EconPapers)
JEL-codes: E44 E58 G12 G18 (search for similar items in EconPapers)
Pages: 30
Date: 2007-09-17
New Economics Papers: this item is included in nep-mac
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http://www.banrep.gov.co/docum/ftp/borra457.pdf

Related works:
Journal Article: Beyond Bubbles: The Role of Asset Prices in Early-Warning Indicators (2008)
Working Paper: Beyond Bubbles: The role of asset prices in early-warning indicators (2007)
Working Paper: Beyond Bubbles:The role of asset prices in early-warning indicators (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:col:000094:004245

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