Forecasting the Fragility of the Banking and Insurance Sector
Kerstin Bernoth () and
No 882, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research
This paper considers the issue of forecasting financial fragility of banks and insurances using a panel data set of performance indicators, namely distance-to- default, taking unobserved common factors into account. We show that common factors are important in the performance of banks and insurances, analyze the influences of a number of observable factors on banking and insurance performance, and evaluate the forecasts from our model. We find that taking unobserved common factors into account reduces the the root mean square forecasts error of firm specific forecasts by up to 11% and of system forecasts by up to 29% relative to a model based only on observed variables. Estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period.
Keywords: Financial stability; financial linkages; banking; insurances; unobserved common factors; forecasting (search for similar items in EconPapers)
JEL-codes: C53 G21 G22 (search for similar items in EconPapers)
Pages: 27 p.
New Economics Papers: this item is included in nep-ban, nep-ecm, nep-eff, nep-for, nep-ias and nep-rmg
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Journal Article: Forecasting the fragility of the banking and insurance sectors (2011)
Working Paper: Forecasting the fragility of the banking and insurance sector (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp882
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