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Towards a new model for early warning signals for systemic financial fragility and near crises: an application to OECD countries

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  • Casu, Barbara
  • Clare, Andrew
  • Saleh, Nashwa

Abstract

Using a signal extraction framework and looking at OECD countries over a 30 year period this paper attempts to identify a number of variables significant in predicting near-crises as a pre-cursor to full-fledged crises. These include growth in pension assets as an indicator for the development of liquidity bubbles, equity market dividend yields as a proxy for corporate balance sheet health, banking sector assets growth and relative size to GDP. We also study the development of asset price bubbles through an equity markets indicator and a house price indicator. Finally we also look at a banking sector funding stability indicator and liquidity indicator on a micro-level. Simultaneously, a dynamic research design improves on previous static set-ups and enhances the model predictive power and applicability to different time periods. This paper shows that as early as 2004, clear signals were being given for a number of countries that vulnerabilities were building up with out-of-sample performance better than in-sample in terms of overall noise to signal ratios, showing a significant improvement compared to earlier work. EWS design has significant implications for financial stability and financial regulation.

Suggested Citation

  • Casu, Barbara & Clare, Andrew & Saleh, Nashwa, 2011. "Towards a new model for early warning signals for systemic financial fragility and near crises: an application to OECD countries," MPRA Paper 37043, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37043
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    File URL: https://mpra.ub.uni-muenchen.de/37043/1/MPRA_paper_37043.pdf
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    References listed on IDEAS

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    Cited by:

    1. Felix Ward, 2014. "Spotting the Danger Zone - Forecasting Financial Crises with Classification Tree Ensembles and Many Predictors," Bonn Econ Discussion Papers bgse01_2014, University of Bonn, Germany.

    More about this item

    Keywords

    financial crises; financial fragility; liquidity bubbles; early warning signals; financial stability; financial regulation;

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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