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Beyond Bubbles:The role of asset prices in early-warning indicators

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  • Esteban Gómez

    ()

  • sandra Rozo

    ()

Abstract

Asset prices have recently become a common topic in economic debate. Nevertheless, much time has been spent in determining if they effectively exhibit a bubble component, and not in examining whether asset prices affectively contain relevant information concerning future market developments. This paper is a first effort in Colombia in this direction, aimed towards the construction of early - warning indicators using financial and real variables. Results show evidence to support that there is relevant information embedded in these series, as all indicators (except the new housing price indicator) show a significant deviation for the year(s) prior to the 98-99 crisis. Additionally, the exercises here conducted show that the performance of asset price indicators is enhanced by including credit and investment. When the early-warning indicators are on, the role of the policy maker should be more active in the market; not necessarily in terms of altering interest rates, but in communicating with market agents, promoting portfolio and perspective (i.e. short and long-term) diversification and urging financial agents to make the best use of the tools that are available to them.

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Bibliographic Info

Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 004050.

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Length: 30
Date of creation: 20 Sep 2007
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Handle: RePEc:col:000094:004050

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Keywords: Asset Price Bubbles; Early-Warning Indicators; Present Value Model; Finan-cial Crisis; Prudential Regulation.;

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References

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Cited by:
  1. Esteban Gómez & Andrés Murcia Pabón & Nancy Zamudio Gómez, . "Financial Conditions Index: Early and Leading Indicator for Colombia?," Temas de Estabilidad Financiera 055, Banco de la Republica de Colombia.
  2. Ponomarenko, Alexey, 2013. "Early warning indicators of asset price boom/bust cycles in emerging markets," Emerging Markets Review, Elsevier, vol. 15(C), pages 92-106.

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