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Mapping the state of financial stability

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  • Sarlin, Peter
  • Peltonen, Tuomas A.

Abstract

The paper uses the Self-Organizing Map for mapping the state of financial stability and visualizing the sources of systemic risks as well as for predicting systemic financial crises. The Self-Organizing Financial Stability Map (SOFSM) enables a two-dimensional representation of a multidimensional financial stability space that allows disentangling the individual sources impacting on systemic risks. The SOFSM can be used to monitor macro-financial vulnerabilities by locating a country in the financial stability cycle: being it either in the pre-crisis, crisis, post-crisis or tranquil state. In addition, the SOFSM performs better than or equally well as a logit model in classifying in-sample data and predicting out-of-sample the global financial crisis that started in 2007. Model robustness is tested by varying the thresholds of the models, the policymaker’s preferences, and the forecasting horizons. JEL Classification: E44, E58, F01, F37, G01

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1382.

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Date of creation: Sep 2011
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Handle: RePEc:ecb:ecbwps:20111382

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Related research

Keywords: macroprudential supervision; prediction; Self-Organizing Map (SOM); Systemic financial crisis; systemic risk; visualization;

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References

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  1. Sarlin, Peter, 2013. "On policymakers’ loss functions and the evaluation of early warning systems," Economics Letters, Elsevier, vol. 119(1), pages 1-7.
  2. Bystrom, Hans N. E., 2004. "The market's view on the probability of banking sector failure: cross-country comparisons," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(5), pages 419-438, December.
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  16. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 5.
  17. Sarlin, Peter & Peltonen, Tuomas A., 2013. "Mapping the state of financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 46-76.
  18. Jaume Puig & Ken Miyajima & Rebecca McCaughrin & Peter Dattels, 2010. "Can You Map Global Financial Stability?," IMF Working Papers 10/145, International Monetary Fund.
  19. repec:ecb:ecbwps:20111426 is not listed on IDEAS
  20. Claudio E. V. Borio & Philip Lowe, 2004. "Securing sustainable price stability: should credit come back from the wilderness?," BIS Working Papers 157, Bank for International Settlements.
  21. Lo Duca, Marco & Peltonen, Tuomas A., 2011. "Macro-financial vulnerabilities and future financial stress: assessing systemic risks and predicting systemic events," Working Paper Series 1311, European Central Bank.
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Citations

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Cited by:
  1. Peter Sarlin, 2014. "Macroprudential oversight, risk communication and visualization," Papers 1404.4550, arXiv.org, revised Jun 2014.
  2. Sarlin, Peter, 2013. "On policymakers' loss function and the evaluation of early warning systems," Working Paper Series 1509, European Central Bank.
  3. Ramsay, Bruce A. & Sarlin, Peter, 2014. "Ending over-lending: Assessing systemic risk with debt to cash flow," Research Discussion Papers 11/2014, Bank of Finland.
  4. Kauko, Karlo, 2012. "External deficits and non-performing loans in the recent financial crisis," Economics Letters, Elsevier, vol. 115(2), pages 196-199.
  5. Betz, Frank & Oprica, Silviu & Peltonen, Tuomas A. & Sarlin, Peter, 2013. "Predicting distress in European banks," Working Paper Series 1597, European Central Bank.
  6. Sarlin, Peter & Peltonen, Tuomas A., 2011. "Mapping the state of financial stability," Working Paper Series 1382, European Central Bank.
  7. Lang, Michael, 2013. "The early warnings of balance-of-payments problems: Kaminsky and Reinhart revisited," Frankfurt School - Working Paper Series 205, Frankfurt School of Finance and Management.

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