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An entropy-based early warning indicator for systemic risk

Monica Billio (), Roberto Casarin (), Michele Costola () and Andrea Pasqualini ()
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Michele Costola: Department of Economics, University Of Venice C� Foscari
Andrea Pasqualini: Department of Economics, University Of Venice C� Foscari

No 2015:09, Working Papers from Department of Economics, University of Venice "Ca' Foscari"

Abstract: The purpose of this paper is the construction of an early warning indicator for systemic risk using entropy measures. The analysis is based on the cross-sectional distribution of marginal systemic risk measures such as Marginal Expected Shortfall, Delta CoVaR and network connectedness. These measures are conceived at a single institution for the financial industry in the Euro area. We estimate entropy on these measures by considering different definitions (Shannon, Tsallis and Renyi). Finally, we test if these entropy indicators show forecasting abilities in predicting banking crises. In this regard, we use the variable presented in Babeck? et al. (2012) and Alessi and Detken (2011) from European Central Bank. Entropy indicators show promising forecast abilities to predict financial and banking crisis. The proposed early warning signals reveal to be effective in forecasting financial distress conditions.

Keywords: Entropy; systemic risk measures; early warning indicators; aggregation. (search for similar items in EconPapers)
JEL-codes: C10 C11 G12 G29 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-eec, nep-for, nep-ore and nep-rmg
Date: 2015
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Journal Article: An entropy-based early warning indicator for systemic risk (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ven:wpaper:2015:09

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