How to predict financial stress? An assessment of Markov switching models
Thibaut Duprey and
Benjamin Klaus ()
No 2057, Working Paper Series from European Central Bank
This paper predicts phases of the financial cycle by combining a continuous ﬁnancial stress measure in a Markov switching framework. The debt service ratio and property market variables signal a transition to a high ﬁnancial stress regime, while economic sentiment indicators provide signals for a transition to a tranquil state. Whereas the in-sample analysis suggests that these indicators can provide an early warning signal up to several quarters prior to the respective regime change, the out-of-sample ﬁndings indicate that most of this performance is due to the data gathered during the global ﬁnancial crisis. Comparing the prediction performance with a standard binary early warning model reveals that the MS model is outperforming in the vast majority of model speciﬁcations for a horizon up to three quarters prior to the onset of ﬁnancial stress. JEL Classification: C54, G01, G15
Keywords: continuous coincident financial stress measure; early warning model; time-varying transition probability Markov switching model (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Working Paper: How to Predict Financial Stress? An Assessment of Markov Switching Models (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20172057
Access Statistics for this paper
More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().