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

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  • Esteban Gómez

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  • Sandra Rozo

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Abstract

Asset prices have recently become a common topic in economic debate. Nevertheless,much time has been spent in determining if they e®ectively exhibit a bubble component,and not in examining whether asset prices a®ectively contain relevant information concern-ing future market developments. This paper is a ¯rst e®ort in Colombia in this direction,aimed towards the construction of early ¡ warning indicators using ¯nancial and realvariables. Results show evidence to support that there is relevant information embeddedin these series, as all indicators (except the new housing price indicator) show a signif-icant deviation for the year(s) prior to the 98-99 crisis. Additionally, the exercises hereconducted show that the performance of asset price indicators is enhanced by includingcredit and investment. When the early-warning indicators are on, the role of the policymaker should be more active in the market; not necessarily in terms of altering interestrates, but in communicating with market agents, promoting portfolio and perspective (i.e.short and long-term) diversi¯cation and urging ¯nancial agents to make the best use ofthe 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 004245.

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Length: 30
Date of creation: 17 Sep 2007
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Handle: RePEc:col:000094:004245

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

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Cited by:
  1. 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.
  2. 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.

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