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Early warning or too late? A (pseudo-)real-time identification of leading indicators of financial stress

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  • Duprey, Thibaut
  • Klaus, Benjamin

Abstract

We use logit and Markov switching models to assess, in (pseudo-)real-time, the ability of 27 indicators to predict systemic financial crises in the European Union. Before the global financial crisis (GFC), some models provided early warning signals, but it is unclear whether a specific model would have been favored over other candidate models providing contradictory evidence. Only after the GFC do debt service ratios, credit-to-GDP gaps as well as house price-to-income and house price-to-rent ratios appear as robust early warning indicators. Our results highlight that the predictive ability of indicators may change due to new risk factors or policy actions.

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  • Duprey, Thibaut & Klaus, Benjamin, 2022. "Early warning or too late? A (pseudo-)real-time identification of leading indicators of financial stress," Journal of Banking & Finance, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:jbfina:v:138:y:2022:i:c:s0378426621001552
    DOI: 10.1016/j.jbankfin.2021.106196
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    More about this item

    Keywords

    Time-varying transition probability Markov switching model; Country-level index of financial stress; Financial cycle turning point; Macro-financial leading indicators;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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