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A Semiparametric Early Warning Model of Financial Stress Events

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Author Info

  • Ian Christensen
  • Fuchun Li

Abstract

The authors use the Financial Stress Index created by the International Monetary Fund to predict the likelihood of financial stress events for five developed countries: Canada, France, Germany, the United Kingdom and the United States. They use a semiparametric panel data model with nonparametric specification of the link functions and linear index function. The empirical results show that the semiparametric early warning model captures some well-known financial stress events. For Canada, Germany, the United Kingdom and the United States, the semiparametric model can provide much better out-of-sample predicted probabilities than the logit model for the time period from 2007Q2 to 2010Q2, while for France, the logit model provides better performance for non-financial stress events than the semiparametric model.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 13-13.

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Length: 47 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bca:bocawp:13-13

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Related research

Keywords: Econometric and statistical methods; Financial stability;

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References

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  1. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, 05.
  2. Holló, Dániel & Kremer, Manfred & Lo Duca, Marco, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series 1426, European Central Bank.
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  8. Lavergne, Pascal, 2001. "An equality test across nonparametric regressions," Journal of Econometrics, Elsevier, vol. 103(1-2), pages 307-344, July.
  9. Klein, Roger W & Spady, Richard H, 1993. "An Efficient Semiparametric Estimator for Binary Response Models," Econometrica, Econometric Society, vol. 61(2), pages 387-421, March.
  10. Hali J. Edison, 2003. "Do indicators of financial crises work? An evaluation of an early warning system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 11-53.
  11. Miroslav Misina & Greg Tkacz, 2009. "Credit, Asset Prices, and Financial Stress," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 95-122, December.
  12. Subir Lall & Roberto Cardarelli & Selim Elekdag, 2009. "Financial Stress, Downturns, and Recoveries," IMF Working Papers 09/100, International Monetary Fund.
  13. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
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