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Cross-country linkages and spill-overs in early warning models for financial crises

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  • Lang, Jan Hannes

Abstract

This paper uses data on bilateral foreign exposures of domestic banking systems in order to construct early warning models for financial crises that take into account cross-country spill-overs of vulnerabilities. The empirical results show that incorporating cross-country financial linkages can improve the signalling performance of early warning models. The relative usefulness increases from 65% to 87% and the AUROC from 0.89 to 0.97 when weighted foreign variables are added to domestic variables in a multivariate logit early warning model. The findings of the paper also suggest that global variables still play a role in predicting financial crises, even when foreign variables are controlled for, which could suggest that both cross-country spill-overs and contagion are important factors for driving financial crises. A parsimonious model with nine variables that combines domestic, foreign and global variables yields an out-of-sample relative usefulness of 0.82 with Type I and Type II errors of 0.11 and 0.07. JEL Classification: G01, G17, F37, F65

Suggested Citation

  • Lang, Jan Hannes, 2018. "Cross-country linkages and spill-overs in early warning models for financial crises," Working Paper Series 2160, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20182160
    Note: 2731285
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    Cited by:

    1. Dieckelmann, Daniel, 2020. "Cross-border lending and the international transmission of banking crises," Discussion Papers 2020/13, Free University Berlin, School of Business & Economics.
    2. Lang, Jan Hannes & Izzo, Cosimo & Fahr, Stephan & Ruzicka, Josef, 2019. "Anticipating the bust: a new cyclical systemic risk indicator to assess the likelihood and severity of financial crises," Occasional Paper Series 219, European Central Bank.

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    More about this item

    Keywords

    early warning models; financial crises; financial linkages;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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