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Critical slowing down as an early warning signal for financial crises?

Author

Listed:
  • Cees Diks

    (University of Amsterdam
    Tinbergen Institute)

  • Cars Hommes

    (University of Amsterdam
    Tinbergen Institute)

  • Juanxi Wang

    (University of Amsterdam
    Cranfield University)

Abstract

Financial crises have repeatedly been coined as a potential application area in the recent literature on constructing early warning signals through identifying characteristics of critical slowing down on the basis of time series observations. To test this idea, we consider four historical financial crises—Black Monday 1987, the 1997 Asian Crisis, the 2000 Dot-com bubble burst, and the 2008 Financial Crisis—and investigate whether there is evidence for critical slowing down prior to these market collapses. We find statistical evidence for critical slowing down before Black Monday 1987, while the results are mixed or insignificant for the more recent financial crises.

Suggested Citation

  • Cees Diks & Cars Hommes & Juanxi Wang, 2019. "Critical slowing down as an early warning signal for financial crises?," Empirical Economics, Springer, vol. 57(4), pages 1201-1228, October.
    • Handle: RePEc:spr:empeco:v:57:y:2019:i:4:d:10.1007_s00181-018-1527-3
    DOI: 10.1007/s00181-018-1527-3
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    Cited by:

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    2. Safarzyńska, Karolina & van den Bergh, Jeroen C.J.M., 2017. "Integrated crisis-energy policy: Macro-evolutionary modelling of technology, finance and energy interactions," Technological Forecasting and Social Change, Elsevier, vol. 114(C), pages 119-137.
    3. Hayette Gatfaoui & Isabelle Nagot & Philippe de Peretti, 2016. "Are critical slowing down indicators useful to detect financial crises?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01339815, HAL.
    4. Jan Willem van den End, 2019. "Applying Complexity Theory to Interest Rates: Evidence of Critical Transitions in the Euro Area," Credit and Capital Markets, Credit and Capital Markets, vol. 52(1), pages 1-33.
    5. Maria Alina Carataș & Elena Cerasela Spătariu & Raluca Andreea Trandafir, 2019. "Triggers of the Economic Crisis," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 237-241, December.
    6. Haoyu Wen & Massimo Pica Ciamarra & Siew Ann Cheong, 2018. "How one might miss early warning signals of critical transitions in time series data: A systematic study of two major currency pairs," PLOS ONE, Public Library of Science, vol. 13(3), pages 1-22, March.
    7. Xing, Kai & Luo, Dan & Liu, Lanlan, 2023. "Macroeconomic conditions, corporate default, and default clustering," Economic Modelling, Elsevier, vol. 118(C).
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    More about this item

    Keywords

    Time series; Bifurcations; Nonlinear dynamical systems; Critical slowing down; Early warning signal; Financial instability;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G01 - Financial Economics - - General - - - Financial Crises

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