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Mapping the state of financial stability

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  • Sarlin, Peter
  • Peltonen, Tuomas A.

Abstract

The aim of this paper is to introduce modern mapping techniques to the finance community. Mapping techniques provide means for representing high-dimensional data on low-dimensional displays. This paper lays out a methodology called the Self-Organizing Financial Stability Map (SOFSM) based upon data and dimensionality reduction that can be used for mapping the state of financial stability and visualizing potential sources of systemic risks. Besides of its visualization capabilities, the SOFSM can be used as an early-warning model that can be calibrated according to policymakers’ preferences between missing systemic financial crises and issuing false alarms. An application of the SOFSM to the recent global financial crisis shows that it performs on par with a statistical benchmark model and correctly calls the crises that started in 2007 in the United States and the euro area.

Suggested Citation

  • Sarlin, Peter & Peltonen, Tuomas A., 2013. "Mapping the state of financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 46-76.
    • Handle: RePEc:eee:intfin:v:26:y:2013:i:c:p:46-76
    DOI: 10.1016/j.intfin.2013.05.002
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    More about this item

    Keywords

    Mapping techniques; Self-Organizing Financial Stability Map (SOFSM); Systemic financial crisis; Systemic risk; Visualization; Prediction;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F01 - International Economics - - General - - - Global Outlook
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises

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