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Macro-financial vulnerabilities and future financial stress: Assessing systemic risks and predicting systemic events

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  • Lo Luca, Marco
  • Peltonen, Tuomas

Abstract

This paper develops a framework for assessing systemic risks and for predicting (out-of-sample) systemic events, i.e. periods of extreme financial instability with potential real costs. We test the ability of a wide range of stand alone. and composite indicators in predicting systemic events and evaluate them by taking into account policy makers f preferences between false alarms and missing signals. Our results highlight the importance of considering jointly various indicators in a multiva-riate framework. We find that taking into account jointly domestic and global macro-financial vul-nerabilities greatly improves the performance of discrete choice models in forecasting systemic events. Our framework shows a good out-of-sample performance in predicting the last financial cri-sis. Finally, our model would have issued an early warning signal for the United States in 2006Q2, 5 quarters before the emergence of money markets tensions in August 2007.

Suggested Citation

  • Lo Luca, Marco & Peltonen, Tuomas, 2011. "Macro-financial vulnerabilities and future financial stress: Assessing systemic risks and predicting systemic events," BOFIT Discussion Papers 2/2011, Bank of Finland Institute for Emerging Economies (BOFIT).
    • Handle: RePEc:zbw:bofitp:bdp2011_002
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    3. Bitetto, Alessandro & Cerchiello, Paola & Mertzanis, Charilaos, 2023. "On the efficient synthesis of short financial time series: A Dynamic Factor Model approach," Finance Research Letters, Elsevier, vol. 53(C).

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    More about this item

    Keywords

    Avaisanat: Early warning indicators; asset price booms and busts; financial stress; macro-prudential policies;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F01 - International Economics - - General - - - Global Outlook
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises

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