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Mapping the state of financial stability

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Author Info

  • 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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 26 (2013)
Issue (Month): C ()
Pages: 46-76

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Handle: RePEc:eee:intfin:v:26:y:2013:i:c:p:46-76

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Web page: http://www.elsevier.com/locate/intfin

Related research

Keywords: Mapping techniques; Self-Organizing Financial Stability Map (SOFSM); Systemic financial crisis; Systemic risk; Visualization; Prediction;

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References

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  1. Stephan Danninger & Irina Tytell & Ravi Balakrishnan & Selim Elekdag, 2009. "The Transmission of Financial Stress From Advanced to Emerging Economies," IMF Working Papers 09/133, International Monetary Fund.
  2. Sarlin, Peter, 2013. "On policymakers' loss function and the evaluation of early warning systems," Working Paper Series 1509, European Central Bank.
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  15. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 5.
  16. Sarlin, Peter & Peltonen, Tuomas A., 2011. "Mapping the State of Financial Stability," BOFIT Discussion Papers 18/2011, Bank of Finland, Institute for Economies in Transition.
  17. Lo Duca, Marco & Peltonen, Tuomas A., 2011. "Macro-financial vulnerabilities and future financial stress: assessing systemic risks and predicting systemic events," Working Paper Series 1311, European Central Bank.
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Citations

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Cited by:
  1. Peter Sarlin, 2014. "Macroprudential oversight, risk communication and visualization," Papers 1404.4550, arXiv.org, revised Jun 2014.
  2. Sarlin, Peter & Peltonen, Tuomas A., 2011. "Mapping the State of Financial Stability," BOFIT Discussion Papers 18/2011, Bank of Finland, Institute for Economies in Transition.
  3. Sarlin, Peter, 2013. "On policymakers' loss function and the evaluation of early warning systems," Working Paper Series 1509, European Central Bank.
  4. Betz, Frank & Oprica, Silviu & Peltonen, Tuomas A. & Sarlin, Peter, 2013. "Predicting distress in European banks," Working Paper Series 1597, European Central Bank.
  5. Lang, Michael, 2013. "The early warnings of balance-of-payments problems: Kaminsky and Reinhart revisited," Frankfurt School - Working Paper Series 205, Frankfurt School of Finance and Management.
  6. Kauko, Karlo, 2012. "External deficits and non-performing loans in the recent financial crisis," Economics Letters, Elsevier, vol. 115(2), pages 196-199.
  7. Ramsay, Bruce A. & Sarlin, Peter, 2014. "Ending over-lending: Assessing systemic risk with debt to cash flow," Research Discussion Papers 11/2014, Bank of Finland.

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