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Forecasting the fragility of the banking and insurance sector

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  • Kerstin Bernoth
  • Andreas Pick

Abstract

This paper considers the issue of forecasting financial fragility of banks and insurances using a panel data set of performance indicators, namely distance-to-default, taking unobserved common factors into account. We show that common factors are important in the performance of banks and insurances, analyze the influences of a number of observable factors on banking and insurance performance, and evaluate the forecasts from our model. We find that taking unobserved common factors into account reduces the root mean square forecasts error of  firm specific forecasts by up to 11% and of system forecasts by up to 29% relative to a model based only on observed variables. 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

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 202.

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Date of creation: Feb 2009
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Handle: RePEc:dnb:dnbwpp:202

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Keywords: Financial stability; financial linkages; banking; insurances; unobserved common factors; forecasting;

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Cited by:
  1. Martín Saldías, 2011. "A Market-based Approach to Sector Risk Determinants and Transmission in the Euro Area," Working Papers w201130, Banco de Portugal, Economics and Research Department.
  2. 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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