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Thibaut Duprey

15 December 2015
WORKING PAPER SERIES - No. 1873
Details
Abstract
This paper introduces a new methodology to date systemic financial stress events in a transparent, objective and reproducible way. The financial cycle is captured by a monthly country-specific financial stress index. Based on a Markov Switching model, high financial stress regimes are identified and a simple algorithm is used to select those episodes of financial stress that are associated with a substantial negative impact on the real economy. By applying this framework to 27 EU countries, the paper is a first attempt to provide a chronology of systemic financial stress episodes in addition to the expert-detected events available so far.
JEL Code
C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling
G01 : Financial Economics→General→Financial Crises
G15 : Financial Economics→General Financial Markets→International Financial Markets
8 May 2017
WORKING PAPER SERIES - No. 2057
Details
Abstract
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 Code
C54 : Mathematical and Quantitative Methods→Econometric Modeling→Quantitative Policy Modeling
G01 : Financial Economics→General→Financial Crises
G15 : Financial Economics→General Financial Markets→International Financial Markets