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Nowcasting and forecasting global financial sector stress and credit market dislocation

Author

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  • Schwaab, Bernd
  • Koopman, Siem Jan
  • Lucas, André

Abstract

We introduce a new international model for the systematic distress risk of financial institutions from the US, the European Union, and the Asia-Pacific region. Our proposed dynamic factor model can be represented as a nonlinear, non-Gaussian state space model with parameters that we estimate using Monte Carlo maximum likelihood methods. We construct measures of global financial sector risk and of credit market dislocation, where credit market dislocation is defined as a significant and persistent decoupling of the credit risk cycle from macro-financial fundamentals in one or more regions. We show that, in the past, such decoupling has preceded episodes of systemic financial distress. Our new measure provides a risk-based indicator of credit conditions, and as such, complements earlier quantity-based indicators from the literature. In an extensive comparison with such quantity-based systemic risk indicators, we find that the behaviour of the new indicator is competitive with that of the best quantity-based indicators.

Suggested Citation

  • Schwaab, Bernd & Koopman, Siem Jan & Lucas, André, 2014. "Nowcasting and forecasting global financial sector stress and credit market dislocation," International Journal of Forecasting, Elsevier, vol. 30(3), pages 741-758.
  • Handle: RePEc:eee:intfor:v:30:y:2014:i:3:p:741-758 DOI: 10.1016/j.ijforecast.2013.10.004
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    References listed on IDEAS

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    Cited by:

    1. Grundke, Peter & Pliszka, Kamil, 2015. "A macroeconomic reverse stress test," Discussion Papers 30/2015, Deutsche Bundesbank.
    2. Eser, Fabian & Schwaab, Bernd, 2016. "Evaluating the impact of unconventional monetary policy measures: Empirical evidence from the ECB׳s Securities Markets Programme," Journal of Financial Economics, Elsevier, vol. 119(1), pages 147-167.
    3. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, pages 91-114.

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