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Predicting Financial Crises: Draw Probabilities as Leading Indicators

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  • Zeyu Jin
  • Demos Vardiabasis
  • Samuel Seaman

Abstract

This paper explores the use of sequential draw probabilities for two "players", banking and enterprise sectors, to predict impending financial crisis. Financial crises typically follow cyclical patterns where positive and negative turns are generated by underlying economic mechanisms. We envisage risk transfer between the financial sector and the real economy as one such mechanism. An analysis of draw probabilities calculated for differences in essential measures of fiscal risk, from the banking and enterprise sectors, reveals a intriguing phenomenon that may be used to assess the proximity (or remoteness) and possible intensity of financial crisis. Specifically, we provide evidence that draw probabilities comparing the competitive differences in Return of Equity between banks and enterprises, can be helpful in gauging asymmetry of risk; where such asymmetry has, historically, preceded grim financial outcomes.

Suggested Citation

  • Zeyu Jin & Demos Vardiabasis & Samuel Seaman, 2016. "Predicting Financial Crises: Draw Probabilities as Leading Indicators," Athens Journal of Business & Economics, Athens Institute for Education and Research (ATINER), vol. 2(3), pages 241-250, July.
    • Handle: RePEc:ate:journl:ajbev2i3-1
    DOI: =10.30958/ajbe.2-3-1
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    References listed on IDEAS

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    1. Stijn Claessens & M. Ayhan Kose & Marco E. Terrones, 2011. "Financial Cycles: What? How? When?," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 7(1), pages 303-344.
    2. Enrique G. Mendoza & Marco E. Terrones, 2014. "An Anatomy of Credit Booms and their Demise," Central Banking, Analysis, and Economic Policies Book Series, in: Miguel Fuentes D. & Claudio E. Raddatz & Carmen M. Reinhart (ed.),Capital Mobility and Monetary Policy, edition 1, volume 18, chapter 6, pages 165-204, Central Bank of Chile.
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