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Mapping the State of Financial Stability

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  • Sarlin, Peter

    ()
    (BOFIT)

  • Peltonen, Tuomas A.

    (BOFIT)

Abstract

The paper uses the Self-Organizing Map for mapping the state of financial stability and visualizing the sources of systemic risks on a two-dimensional plane 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 and thus 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 horizon.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 18/2011.

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Length: 44 pages
Date of creation: 22 Aug 2011
Date of revision:
Handle: RePEc:hhs:bofitp:2011_018

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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
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Web page: http://www.suomenpankki.fi/bofit_en/
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Related research

Keywords: systemic financial crisis; systemic risk; self-organizing maps; visualisation; prediction; macroprudential supervision;

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References

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  1. Jaume Puig & Ken Miyajima & Rebecca McCaughrin & Peter Dattels, 2010. "Can You Map Global Financial Stability?," IMF Working Papers 10/145, International Monetary Fund.
  2. Fratzscher, Marcel & Matthieu Bussiere, 2003. "Towards A New Early Warning System of Financial Crises," Royal Economic Society Annual Conference 2003, Royal Economic Society 81, Royal Economic Society.
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  6. Sarlin, Peter, 2013. "On policymakers’ loss functions and the evaluation of early warning systems," Economics Letters, Elsevier, vol. 119(1), pages 1-7.
  7. Craig S. Hakkio & William R. Keeton, 2009. "Financial stress: what is it, how can it be measured, and why does it matter?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-50.
  8. Sarlin, Peter & Peltonen, Tuomas A., 2011. "Mapping the State of Financial Stability," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 18/2011, Bank of Finland, Institute for Economies in Transition.
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  21. 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.
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  24. repec:ecb:ecbwps:20111426 is not listed on IDEAS
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Citations

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Cited by:
  1. Betz, Frank & Oprica, Silviu & Peltonen, Tuomas A. & Sarlin, Peter, 2013. "Predicting distress in European banks," Working Paper Series, European Central Bank 1597, European Central Bank.
  2. Sarlin, Peter & Peltonen, Tuomas A., 2013. "Mapping the state of financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 26(C), pages 46-76.
  3. Lainà, Patrizio & Nyholm, Juho & Sarlin, Peter, 2014. "Leading indicators of systemic banking crises: Finland in a panel of EU countries," Research Discussion Papers 14/2014, Bank of Finland.
  4. Peter Sarlin, 2014. "Macroprudential oversight, risk communication and visualization," Papers 1404.4550, arXiv.org, revised Jun 2014.
  5. Sarlin, Peter, 2013. "On policymakers' loss function and the evaluation of early warning systems," Working Paper Series, European Central Bank 1509, European Central Bank.
  6. 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.
  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.
  8. Kauko, Karlo, 2012. "External deficits and non-performing loans in the recent financial crisis," Economics Letters, Elsevier, vol. 115(2), pages 196-199.

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