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Mapping the state of financial stability

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  • Peltonen, Tuomas
  • Sarlin, Peter

Abstract

The paper uses the Self-Organizing Map for mapping the state of financial stability and visualizing the sources of systemic risks as well as for predicting systemic financial crises. The Self-Organizing Financial Stability Map (SOFSM) enables a two-dimensional representation of a multidimensional financial stability space that allows disentangling the individual sources impacting on systemic risks. The SOFSM can be used to monitor macro-financial vulnerabilities by locating a country in the financial stability cycle: being it either in the pre-crisis, crisis, post-crisis or tranquil state. In addition, the SOFSM performs better than or equally well as a logit model in classifying in-sample data and predicting out-of-sample the global financial crisis that started in 2007. Model robustness is tested by varying the thresholds of the models, the policymaker's preferences, and the forecasting horizons. JEL Classification: E44, E58, F01, F37, G01

Suggested Citation

  • Peltonen, Tuomas & Sarlin, Peter, 2011. "Mapping the state of financial stability," Working Paper Series 1382, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20111382
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    References listed on IDEAS

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    Cited by:

    1. Oscar Claveria, 2017. "“What really matters is the economic performance: Positioning tourist destinations by means of perceptual maps," IREA Working Papers 201713, University of Barcelona, Research Institute of Applied Economics, revised Jun 2017.
    2. Sarlin, Peter, 2013. "On policymakers’ loss functions and the evaluation of early warning systems," Economics Letters, Elsevier, vol. 119(1), pages 1-7.
    3. Savas Papadopoulos & Pantelis Stavroulias & Thomas Sager, 2016. "Systemic early warning systems for EU15 based on the 2008 crisis," Working Papers 202, Bank of Greece.
    4. Kauko, Karlo, 2014. "How to foresee banking crises? A survey of the empirical literature," Economic Systems, Elsevier, vol. 38(3), pages 289-308.
    5. Sarlin, Peter & Ramsay, Bruce A., 2014. "Ending over-lending : Assessing systemic risk with debt to cash flow," Research Discussion Papers 11/2014, Bank of Finland.
    6. Mark D. Flood & Victoria L. Lemieux & Margaret Varga & B.L. William Wong, 2014. "The Application of Visual Analytics to Financial Stability Monitoring," Working Papers 14-02, Office of Financial Research, US Department of the Treasury, revised 07 Oct 2014.
    7. Savas Papadopoulos & Pantelis Stavroulias & Thomas Sager & Etti Baranoff, 2017. "A ternary-state early warning system for the European Union," Working Papers 222, Bank of Greece.
    8. Ons Jedidi & Jean Sébastien Pentecote, 2015. "Robust Signals for Banking Crises," Economics Bulletin, AccessEcon, vol. 35(3), pages 1617-1629.
    9. 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.
    10. Kauko, Karlo, 2012. "External deficits and non-performing loans in the recent financial crisis," Economics Letters, Elsevier, vol. 115(2), pages 196-199.
    11. Lainà, Patrizio & Nyholm, Juho & Sarlin, Peter, 2015. "Leading indicators of systemic banking crises: Finland in a panel of EU countries," Review of Financial Economics, Elsevier, vol. 24(C), pages 18-35.
    12. Oscar Claveria & Enric Monte & Salvador Torra, 2015. "“Self-organizing map analysis of agents' expectations. Different patterns of anticipation of the 2008 financial crisis”," IREA Working Papers 201511, University of Barcelona, Research Institute of Applied Economics, revised Mar 2015.
    13. Flood, Mark D. & Lemieux, Victoria L. & Varga, Margaret & William Wong, B.L., 2016. "The application of visual analytics to financial stability monitoring," Journal of Financial Stability, Elsevier, vol. 27(C), pages 180-197.
    14. Sarlin, Peter, 2014. "Macroprudential oversight, risk communication and visualization," LSE Research Online Documents on Economics 61217, London School of Economics and Political Science, LSE Library.
    15. Lang, Michael, 2013. "The early warnings of balance-of-payments problems: Kaminsky and Reinhart revisited," Frankfurt School - Working Paper Series 205, Frankfurt School of Finance and Management.
    16. Ons Jedidi & Jean-Sébastien Pentecôte, 2015. "Prédire les crises bancaires : un système d’alerte robuste," Revue française d'économie, Presses de Sciences-Po, vol. 0(3), pages 189-225.
    17. Sarlin, Peter, 2016. "Macroprudential oversight, risk communication and visualization," Journal of Financial Stability, Elsevier, vol. 27(C), pages 160-179.
    18. Markus Holopainen & Peter Sarlin, 2015. "Toward robust early-warning models: A horse race, ensembles and model uncertainty," Papers 1501.04682, arXiv.org, revised Apr 2016.
    19. Peltonen, Tuomas & Sarlin, Peter & Rancan, Michela, 2015. "Interconnectedness of the banking sector as a vulnerability to crises," Working Paper Series 1866, European Central Bank.
    20. Borgy, Vladimir & Clerc, Laurent & Renne, Jean-Paul, 2014. "Measuring aggregate risk: Can we robustly identify asset-price boom–bust cycles?," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 132-150.
    21. Sarlin, Peter & Ramsay, Bruce A., 2015. "Ending over-lending: assessing systemic risk with debt to cash flow," Working Paper Series 1769, European Central Bank.
    22. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
    23. Office of Financial Research (ed.), 2013. "Office of Financial Research 2013 Annual Report," Reports, Office of Financial Research, US Department of the Treasury, number 13-2.

    More about this item

    Keywords

    macroprudential supervision; prediction; Self-Organizing Map (SOM); Systemic financial crisis; systemic risk; visualization;

    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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