Towards a new model for early warning signals for systemic financial fragility and near crises: an application to OECD countries

Barbara Casu, Andrew Clare and Nashwa Saleh

MPRA Paper from University Library of Munich, Germany

Abstract: Using a signal extraction framework and looking at OECD countries over a 30 year period this paper attempts to identify a number of variables significant in predicting near-crises as a pre-cursor to full-fledged crises. These include growth in pension assets as an indicator for the development of liquidity bubbles, equity market dividend yields as a proxy for corporate balance sheet health, banking sector assets growth and relative size to GDP. We also study the development of asset price bubbles through an equity markets indicator and a house price indicator. Finally we also look at a banking sector funding stability indicator and liquidity indicator on a micro-level. Simultaneously, a dynamic research design improves on previous static set-ups and enhances the model predictive power and applicability to different time periods. This paper shows that as early as 2004, clear signals were being given for a number of countries that vulnerabilities were building up with out-of-sample performance better than in-sample in terms of overall noise to signal ratios, showing a significant improvement compared to earlier work. EWS design has significant implications for financial stability and financial regulation.

Keywords: financial crises; financial fragility; liquidity bubbles; early warning signals; financial stability; financial regulation (search for similar items in EconPapers)
JEL-codes: G01 G18 G28 (search for similar items in EconPapers)
Date: 2011-12-29
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (1)

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