Casu, Barbara and Clare, Andrew and Saleh, Nashwa (2011): Towards a new model for early warning signals for systemic financial fragility and near crises: an application to OECD countries.
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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.
|Item Type:||MPRA Paper|
|Original Title:||Towards a new model for early warning signals for systemic financial fragility and near crises: an application to OECD countries|
|Keywords:||financial crises, financial fragility, liquidity bubbles, early warning signals, financial stability, financial regulation|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G0 - General > G01 - Financial Crises
|Depositing User:||Nashwa Saleh|
|Date Deposited:||02. Mar 2012 20:04|
|Last Modified:||14. Feb 2013 23:37|
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