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Systemic Event Prediction by Early Warning System

Listed author(s):
  • Diana Zigraiova

    ()

    (Czech National Bank and Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)

  • Petr Jakubik

    ()

    (European Insurance and Occupational Pensions Authority (EIOPA) and Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)

This work develops an early warning system framework for assessing systemic risks and for predicting systemic events, i.e. periods of extreme financial instability with potential real costs, over the short horizon of six quarters and the long horizon of twelve quarters on the panel of 14 countries, both advanced and developing. First, we build Financial Stress Index to identify starting dates of systemic financial crises for each country in the panel. Second, early warning indicators for assessment and prediction of systemic risks are selected in a two-step approach; relevant prediction horizons for each indicator are found by the univariate logit model followed by the application of Bayesian model averaging method to identify the most useful indicators. Next, we validate early warning model, containing only useful indicators, for both horizons on the panel. Finally, the in-sample performance of the constructed EWS over both horizons is assessed for the Czech Republic. We find that the model over the 3 years’ horizon slightly outperforms the EWS with the horizon of 1.5 years on the Czech data. The long model attains the maximum utility in crises detection as well as it maximizes area under Receiver Operating Characteristics curve which measures the quality of the forecast.

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File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/5023/lang/cs
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Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2014/01.

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Length: 36pages
Date of creation: Jan 2014
Date of revision: Jan 2014
Handle: RePEc:fau:wpaper:wp2014_01
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  1. Marco Lo Duca & Tuomas Peltonen, 2011. "Macrofinancial vulnerabilities and future financial stress: assessing systemic risks and predicting systemic events," BIS Papers chapters,in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 82-88 Bank for International Settlements.
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  25. Jan Babecky & Tomas Havranek & Jakub Mateju & Marek Rusnak & Katerina Smidkova & Borek Vasicek, 2011. "Early Warning Indicators of Economic Crises: Evidence from a Panel of 40 Developed Countries," Working Papers 2011/08, Czech National Bank, Research Department.
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