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Evaluating measures of adverse financial conditions

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  • Oet, Mikhail V.
  • Gramlich, Dieter
  • Sarlin, Peter

Abstract

Timely identification and anticipation of adverse conditions in the financial system are critical for macroprudential policy. However, there is no consensus on how to evaluate the quality of systemic measures. This paper provides a framework to compare measures of systemic conditions. We illustrate the proposed tests with a case study of US measures from 1976 to 2013. We find that measures which include information from multiple markets improve identification of critical system states. However, tested measures show limited capacity to anticipate critical episodes.

Suggested Citation

  • Oet, Mikhail V. & Gramlich, Dieter & Sarlin, Peter, 2016. "Evaluating measures of adverse financial conditions," Journal of Financial Stability, Elsevier, vol. 27(C), pages 234-249.
  • Handle: RePEc:eee:finsta:v:27:y:2016:i:c:p:234-249
    DOI: 10.1016/j.jfs.2016.06.008
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    More about this item

    Keywords

    Measures of systemic conditions; Evaluation of information quality; Signal extraction approach; Pervasiveness; Persistence; Severity; Noise-to-signal ratio; Relative usefulness; Information value;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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