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Forecasting the fragility of the banking and insurance sectors

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  • Bernoth, Kerstin
  • Pick, Andreas

Abstract

Linkages between banks and insurance companies are important when forecasting the fragility of the banking and insurance sectors. We propose a novel empirical framework that allows us to estimate unobserved linkages in panel data sets that contain observed regressors. We find that taking unobserved common factors into account reduces the root mean square forecasts error of firm specific forecasts by up to 9%, of system forecasts by up to 14%, and by up to 39% for systemic forecasts of more distressed firms relative to a model based on observed variables only. Estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 4 (April)
Pages: 807-818

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:4:p:807-818

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Keywords: Financial stability Financial linkages Banking Insurances Unobserved common factors;

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Cited by:
  1. Saldías, Martín, 2013. "A market-based approach to sector risk determinants and transmission in the euro area," Working Paper Series 1574, European Central Bank.
  2. Wenzel, Lars & Wolf, André, 2013. "Short-term forecasting with business surveys: Evidence for German IHK data at federal state level," HWWI Research Papers 140, Hamburg Institute of International Economics (HWWI).
  3. M. Kabir Hassan & William J. Hippler III, 2013. "The Pronounced Impact of Macroeconomic Stress on the Financial Sector: Implications for Real Sector Growth," NFI Working Papers 2013-WP-01, Indiana State University, Scott College of Business, Networks Financial Institute.
  4. Vallascas, Francesco & Keasey, Kevin, 2012. "Bank resilience to systemic shocks and the stability of banking systems: Small is beautiful," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1745-1776.
  5. Martín Saldías, 2011. "Sectoral credit risk in the euro area," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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