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Could Early Warning Systems Have Helped To Predict the Sub-Prime Crisis?

Author

Listed:
  • E. Philip Davis

    (Brunel University, Uxbridge, Middlesex, UB8 3PH and NIES, e_philip_davis@msn.com)

  • Dilruba Karim

    (Brunel University, Uxbridge, Middlesex, UB8 3PH, dilruba.karim@brunel.ac.uk)

Abstract

One of the features of the sub-prime crisis, that began in August 2007, was its unexpected nature. It came as a surprise not only to most financial market participants but also in some degree to the policy community. In this context, we seek to assess whether early warning systems based on the logit and binomial tree approaches on the UK and US economies could have helped to warn about the crisis. We also consider a `check list approach' of indicators based on history. Although not all of the complementary approaches are successful, we contend that our work suggests that a broadening of approaches to macroprudential analysis is appropriate.

Suggested Citation

  • E. Philip Davis & Dilruba Karim, 2008. "Could Early Warning Systems Have Helped To Predict the Sub-Prime Crisis?," National Institute Economic Review, National Institute of Economic and Social Research, vol. 206(1), pages 35-47, October.
  • Handle: RePEc:sae:niesru:v:206:y:2008:i:1:p:35-47
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    Cited by:

    1. Karl Aiginger, 2010. "Post Crisis Policy: Some Reflections of a Keynesian Economist," WIFO Working Papers 371, WIFO.
    2. Fiordelisi, Franco & Mare, Davide Salvatore, 2013. "Probability of default and efficiency in cooperative banking," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 30-45.
    3. Barrell, Ray & Davis, E. Philip & Karim, Dilruba & Liadze, Iana, 2010. "Bank regulation, property prices and early warning systems for banking crises in OECD countries," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2255-2264, September.
    4. Kimmel, Randall K. & Thornton, John H. & Bennett, Sara E., 2016. "Can statistics-based early warning systems detect problem banks before markets?," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 190-216.
    5. Avadanei, Anamaria, 2010. "Surse ale instabilitatii financiare in contextul crizei internationale. A Literature Review
      [Sources of Financial Instability in the context of the Financial Crisis. A Literature Review]
      ," MPRA Paper 28449, University Library of Munich, Germany.
    6. Kauko, Karlo, 2014. "How to foresee banking crises? A survey of the empirical literature," Economic Systems, Elsevier, vol. 38(3), pages 289-308.
    7. Efthyvoulou, Georgios, 2012. "The impact of financial stress on sectoral productivity," Economics Letters, Elsevier, vol. 116(2), pages 240-243.
    8. Karl Aiginger, 2011. "Why Growth Performance Differed across Countries in the Recent Crisis: the Impact of Pre-crisis Conditions," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 35-52, August.
    9. Caggiano, Giovanni & Calice, Pietro & Leonida, Leone & Kapetanios, George, 2016. "Comparing logit-based early warning systems: Does the duration of systemic banking crises matter?," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 104-116.
    10. Detken, Carsten & Peltonen, Tuomas & Schudel, Willem & Behn, Markus, 2013. "Setting countercyclical capital buffers based on early warning models: would it work?," Working Paper Series 1604, European Central Bank.
    11. AIGINGER Karl, 2011. "Why Performance Differed Across Countries In The Recent Crisis," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 55(2), pages 20-27.
    12. Peltonen, Tuomas & Gross, Marco & Behn, Markus, 2016. "Assessing the costs and benefits of capital-based macroprudential policy," Working Paper Series 1935, European Central Bank.
    13. Betz, Frank & Oprică, Silviu & Peltonen, Tuomas A. & Sarlin, Peter, 2014. "Predicting distress in European banks," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 225-241.
    14. Suh, Sangwon, 2017. "Sudden stops of capital flows to emerging markets: A new prediction approach," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 289-308.
    15. Jing, Zhongbo & de Haan, Jakob & Jacobs, Jan & Yang, Haizhen, 2015. "Identifying banking crises using money market pressure: New evidence for a large set of countries," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 1-20.
    16. Schuetz, Sebastian Alexander, 2010. "Structured Finance Influence on Financial Market Stability – Evaluation of Current Regulatory Developments," MPRA Paper 23574, University Library of Munich, Germany.
    17. Nicholas Crafts & Peter Fearon, 2010. "Lessons from the 1930s Great Depression," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 285-317, Autumn.
    18. CIMPOERU Smaranda, 2016. "European Economies Facing The Global Financial Crisis: Are Emerging Economies More Vulnerable Than Advanced Ones?," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 68(2), pages 69-85, September.
    19. Rainer Masera, 2010. "Reforming financial systems after the crisis: a comparison of EU and USA," PSL Quarterly Review, Economia civile, vol. 63(255), pages 299-362.
    20. Demyanyk, Yuliya & Hasan, Iftekhar, 2010. "Financial crises and bank failures: A review of prediction methods," Omega, Elsevier, vol. 38(5), pages 315-324, October.
    21. Karl Aiginger, 2009. "Strengthening the Resilience of an Economy. Strategies to Prevent another Crisis," WIFO Working Papers 338, WIFO.
    22. Seoung Hwan Suh & Kabsung Kim, 2014. "Global financial crisis and early warning system of Korean housing market," Chapters,in: The Global Financial Crisis and Housing, chapter 4, pages 62-81 Edward Elgar Publishing.
    23. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung & Conseil d'Analyse Écon (ed.), 2010. "Evaluer la performance économique, le bien-être et la soutenabilité. Rapport du Conseil d'analyse économique et du Conseil allemand des experts en économie," Occasional Reports / Expertisen, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, number 75369.
    24. Hamdaoui, Mekki, 2016. "Are systemic banking crises in developed and developing countries predictable?," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 114-138.

    More about this item

    Keywords

    Sub-prime crisis; early warning; financial instability; macroprudential analysis; JEL Classifications: E44; E58;

    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

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