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Mapping the State of Financial Stability

  • Sarlin, Peter



  • Peltonen, Tuomas A.


The paper uses the Self-Organizing Map for mapping the state of financial stability and visualizing the sources of systemic risks on a two-dimensional plane 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 and thus 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 horizon.

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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 18/2011.

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Length: 44 pages
Date of creation: 22 Aug 2011
Date of revision:
Handle: RePEc:hhs:bofitp:2011_018
Contact details of provider: Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
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  1. Marco Fioramanti, 2006. "Predicting Sovereign Debt Crises Using Artificial Neural Networks: A Comparative Approach," ISAE Working Papers 72, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
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  5. Bussière, Matthieu & Fratzscher, Marcel, 2002. "Towards a new early warning system of financial crises," Working Paper Series 0145, European Central Bank.
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  8. Enrica Detragiache & Asli Demirgüç-Kunt, 1999. "Monitoring Banking Sector Fragility: A Multivariate Logit Approach," IMF Working Papers 99/147, International Monetary Fund.
  9. Byström, Hans, 2003. "The Market’s View on the Probability of Banking Sector Failure: Cross-Country Comparisons," Working Papers 2003:2, Lund University, Department of Economics.
  10. Claudio E. V. Borio & Philip Lowe, 2004. "Securing sustainable price stability: should credit come back from the wilderness?," BIS Working Papers 157, Bank for International Settlements.
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  12. Alessi, Lucia & Detken, Carsten, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
  13. Sarlin, Peter, 2013. "On policymakers’ loss functions and the evaluation of early warning systems," Economics Letters, Elsevier, vol. 119(1), pages 1-7.
  14. Alessi, Lucia & Detken, Carsten, 2011. "Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity," European Journal of Political Economy, Elsevier, vol. 27(3), pages 520-533, September.
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  16. Lo Duca, Marco & Peltonen, Tuomas A., 2011. "Macro-financial vulnerabilities and future financial stress: assessing systemic risks and predicting systemic events," Working Paper Series 1311, European Central Bank.
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  18. Sarlin, Peter & Peltonen, Tuomas A., 2013. "Mapping the state of financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 46-76.
  19. repec:ecb:ecbwps:20111426 is not listed on IDEAS
  20. Ismael E Arciniegas Rueda & Fabio Arciniegas, 2005. "SOM-based Data Analysis of Speculative Attacks' Real Effects," International Finance 0507001, EconWPA.
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