Identifying the Predictors for Financial Crisis Using Gibbs Sampler

Jin-Lung Lin and Chung-Shu Wu
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Jin-Lung Lin: Institute of Economics, Academia Sinica
Chung-Shu Wu: Institute of Economics, Academia Sinica

Econometrics from University Library of Munich, Germany

Abstract: The Asian financial crisis broke out in Thailand in July 1997, and rapidly spread throughout the neighboring countries. An important question then arises? Is it possible to predict next financial crisis? If yes, then what are the predictors? The answer lies in combined usage of economic theory and econometric methods. By using the economic theory, one can locate possible potential crisis predictors whereas appropriate econometric models can pinpoint effective ones. In this paper we suggest using the Stochastic Search Variable Selection (SSVS) developed by George and McCulloch (1993) to identify the crisis predictors. As is suggested by the name, SSVS stochastically searches for practically significant variables. Each variable coefficient is assumed to come from a mixture of two normal variates with respectively large and small variances. For the former case, this variable is considered as insignificant and should be excluded from the model whereas for the latter, this variable is significant and should be included in the model. SSVS is not affected by the ordering of the candidate variables and is particularly effective when the sample size is much smaller than the number of all possible models. By employing SSVS method, we conclude that annual growth rate of money supply, $M_2$, and the ratio of government debt to GDP are promising predictors for financial crisis. It is worth mentioning that the frequently mentioned factors, such as ratio of total foreign reserve to GDP and the ratio of current deficit to GDP are not selected by our analysis. Our empirical analysis implies that monetary and fiscal policy play a crucial role in exploring the Asian financial crisis.

Keywords: early; warning (search for similar items in EconPapers)
JEL-codes: C81 F49 L11 R38 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2003-06-12
New Economics Papers: this item is included in nep-fin, nep-geo and nep-ifn
Note: Type of Document - pdf; prepared on Linux tetex ; to print on HP/PostScript/Franciscan monk; pages: 17 ; figures: included/request from author/draw your own
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