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Beyond Bubbles: The role of asset prices in early-warning indicators

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  • Esteban Gómez
  • Sandra Rozo

Abstract

Asset prices have recently become a common topic in economic debate. Nevertheless,much time has been spent in determining if they e®ectively exhibit a bubble component,and not in examining whether asset prices a®ectively contain relevant information concern-ing future market developments. This paper is a ¯rst e®ort in Colombia in this direction,aimed towards the construction of early ¡ warning indicators using ¯nancial and realvariables. Results show evidence to support that there is relevant information embeddedin these series, as all indicators (except the new housing price indicator) show a signif-icant deviation for the year(s) prior to the 98-99 crisis. Additionally, the exercises hereconducted show that the performance of asset price indicators is enhanced by includingcredit and investment. When the early-warning indicators are on, the role of the policymaker should be more active in the market; not necessarily in terms of altering interestrates, but in communicating with market agents, promoting portfolio and perspective (i.e.short and long-term) diversi¯cation and urging ¯nancial agents to make the best use ofthe tools that are available to them.

Suggested Citation

  • Esteban Gómez & Sandra Rozo, 2007. "Beyond Bubbles: The role of asset prices in early-warning indicators," Borradores de Economia 4245, Banco de la Republica.
    • Handle: RePEc:col:000094:004245
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    2. Ponomarenko, Alexey, 2013. "Early warning indicators of asset price boom/bust cycles in emerging markets," Emerging Markets Review, Elsevier, vol. 15(C), pages 92-106.
    3. Esteban Gómez & Andrés Murcia & Nancy Zamundio, 2011. "Financial Conditions Index: Early and Leading Indicator for Colombia," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 29(66), pages 174-220, December.
    4. Ponomarenko, Alexey, 2013. "Early warning indicators of asset price boom/bust cycles in emerging markets," Emerging Markets Review, Elsevier, vol. 15(C), pages 92-106.
    5. Kauko, Karlo, 2014. "How to foresee banking crises? A survey of the empirical literature," Economic Systems, Elsevier, vol. 38(3), pages 289-308.
    6. Seoung Hwan Suh & Kabsung Kim, 2014. "Global financial crisis and early warning system of Korean housing market," Chapters, in: Susan Wachter & Man Cho & Moon Joong Tcha (ed.), The Global Financial Crisis and Housing, chapter 4, pages 62-81, Edward Elgar Publishing.

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    More about this item

    Keywords

    Asset Price Bubbles; Early-Warning Indicators; Present Value Model; Finan-cial Crisis; Prudential Regulation.;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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