Macro-financial vulnerabilities and future financial stress: assessing systemic risks and predicting systemic events

This paper develops a framework for assessing systemic risks and for predicting (out-of-sample) systemic events, i.e. periods of extreme financial instability with potential real costs. We test the ability of a wide range of “stand alone” and composite indicators in predicting systemic events and evaluate them by taking into account policy makers’ preferences between false alarms and missing signals. Our results highlight the importance of considering jointly various indicators in a multivariate framework. We find that taking into account jointly domestic and global macrofinancial vulnerabilities greatly improves the performance of discrete choice models in forecasting systemic events. Our framework shows a good out-of-sample performance in predicting the last financial crisis. Finally, our model would have issued an early warning signal for the United States in 2006 Q2, 5 quarters before the emergence of money markets tensions in August 2007. JEL Classification: E44, E58, F01, F37, G01Asset Price Booms and Busts, Early Warning Indicators, Financial stress, Macro-Prudential Policies

Macro-financial vulnerabilities and future financial stress - Assessing systemic risks and predicting systemic events

This paper develops a framework for assessing systemic risks and for predicting (out-of-sample) systemic events, i.e. periods of extreme financial instability with potential real costs. We test the ability of a wide range of “stand alone” and composite indicators in predicting systemic events and evaluate them by taking into account policy makers’ preferences between false alarms and missing signals. Our results highlight the importance of considering jointly various indicators in a multivariate framework. We find that taking into account jointly domestic and global macro-financial vulnerabilities greatly improves the performance of discrete choice models in forecasting systemic events. Our framework shows a good out-of-sample performance in predicting the last financial crisis. Finally, our model would have issued an early warning signal for the United States in 2006Q2, 5 quarters before the emergence of money markets tensions in August 2007.early warning indicators; asset price booms and busts; financial stress; macro-prudential policies

Early Warning Signals of the 2000/2001 Turkish Financial Crisis

The 2000/2001 Turkish crisis was one of the most impressive crises that hit the emerging market economies in the late 90s. The characteristic of this crisis is not only its violence but also its suddenness. We observe two rapid crisis sequences which are different from recent financial crisis examples. The analysis of the Turkish crisis in the literature generally presents an analytical aspect that only relates the stylized facts of the crisis omitting a strong econometric basis. This paper goes further: it presents two models (OLS and Logit) which will test the implication level of the macroeconomic and financial variables in the outbreak of the crisis.Currency Crisis; Banking System Fragility; Third Generation Crisis Model; Turkey

A review of early warning system models

Financial crises have not declined in number, frequency or severity over the last two decades, rather the contrary. Each crisis causes enormous costs in the countries concerned. Thus, international financial institutions invest in researching early warning systems (EWS). The Early Warning System models can be made most useful to help sustain global growth and maintain financial stability, especially in light of the lessons learned from the current and past crises.Early Warning System models, financial crises

Towards a Macroprudential Surveillance and Remedial Policy Formulation System for Monitoring Financial Crisis

Several developing economies witnessed a large number of systemic financial and currency crises since the 1980s which resulted in severe economic, social, and political problems. The devastating impact of the 1982 and 1994-95 Mexican crises, the 1997-98 Asian financial crisis, the 1998 Russian crisis and the ongoing financial crisis of 2008-2009 suggest that maintaining financial sector stability through reduction of vulnerability is highly crucial. The world is now witnessing an unprecedented systemic financial crisis originated from USA in September 2008 together with a deep worldwide economic recession, particularly in developed countries of Europe and North America. This calls for devising and using on a regular basis an appropriate and effective monitoring and policy formulation system for detecting and addressing vulnerabilities leading to crisis. This paper proposes a macroprudential/financial soundness monitoring, analysis and remedial policy formulation system that can be used by most developing countries with or without crisis experience as well as developed countries with limited data. It also discusses a process for identifying, and compiling a set of leading macroprudential indicators/financial soundness indicators. An empirical illustration using Philippines data is presented.economic and financial vulnerability, macroprudential indicators and financial soundness indicators analysis, macroprudential surveillance and policy, developing countries, financial sector, currency and financial crises, Early Warning Models, Stress Test

Can the persistence of a currency crisis be explained by fundamentals? Markov switching models for exchange market pressure

This paper investigates the contribution of fundamentals to the persistence of currency crises by identifying the determinants of high volatility in the exchange market pressure index (empi) for some new EU member states. The Markov switching model is utilised to identify the high volatility of empi, and a linear regression analysis is conducted to find the sources of the transition probability of the high volatility regime. The evidence does not seem to provide strong support for macroeconomic fundamentals, whereas it highlights the adverse movement of interest rates as the major determinant of the persistence of the currency crisis