Timing asset market peaks: the role of the liquidity risk cycle of the banking system
Abstract
Recent financial crisis showed how the unfolding of liquidity risks of financial intermediaries spilled over to asset markets, contributing to asset price deteriorations and the triggering of liquidity spirals. This paper derives and tests a financial fragility condition for predicting asset price peaks on a real-time basis, by combining the term spread and the aggregate funding liquidity risks of the banking system into a simple binary fragility indicator. The main empirical result of this paper is that the fragility condition predicted all major equity market peaks in Germany during the time period 1973 to 2010, including the subprime crisis of 2007, the New Economy Bubble of 2000, and the 1987 stock market crash. The average lead time of the indicator is 2.9 months. About 80% of the declines were later on associated with significant declines in Industrial Production.Download Info
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36061.Length:
Date of creation: 16 Jan 2012
Date of revision:
Handle: RePEc:pra:mprapa:36061
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Keywords: Predicting Financial Markets; Liquidity Spirals; Macrofinancial Linkages; Asset Price Cycle; Liquidity Management of Financial Intermediaries; Early Warning Indicator;Find related papers by JEL classification:
- G2 - Financial Economics - - Financial Institutions and Services
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-01 (All new papers)
- NEP-BAN-2012-02-01 (Banking)
References
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