A New Cluster-Based Financial Vulnerability Indicator: The Analytical Concept and its Application for Stress Testing in a Post-Socialist Economy

Ivana Herceg and Danijel Nestic ()

No 100, wiiw Balkan Observatory Working Papers from The Vienna Institute for International Economic Studies, wiiw

Abstract: This paper proposes a new approach to household financial vulnerability analysis by employing cluster analysis techniques in the identification of potentially vulnerable households. The cluster-based vulnerability indicator is combined with a binary dependant variable model and used in stress testing. The proposed methodology is applied to householdlevel data for a post-socialist economy – that of Croatia – with the specific aim of testing the extent to which the prolonged economic downturn following the Great Recession of 2008-2009 might hurt indebted households. The paper compares the results based on the new approach with those based on traditional stress testing methods. Interest rate shocks had a stronger impact on household vulnerability in the traditional approach, whereas decreases in employment are found to be more disruptive in the cluster-based approach.

Keywords: household financial vulnerability; cluster analysis; stress testing; Croatia (search for similar items in EconPapers)
Date: 2012-11
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Published as wiiw Balkan Observatory Working Paper

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