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Early warning indicator model of financial developments using an ordered logit

  • Reimers, Hans-Eggert

The recent financial crisis has demonstrated in an impressive way that boom/bust cycles can have devastating effects on the real economy. This paper aims at contributing to the literature on early warning indicator exercises for asset price development. Using a sample of 17 industrialised OECD countries and the euro area over the period 1969 Q1 - 2011 Q2, an asset price composite indicator incorporating developments in both stock and house price markets is constructed. The latter is then further developed in order to identify periods that can be characterised as asset price booms and busts. The subsequent empirical analysis is based on an ordered logit-type approach incorporating several monetary, financial and real variables. Following some statistical tests, credit aggregates, the interest rate spread together with the house price growth gap and stock price developments appear to be useful indicators for the prediction of asset price developments.

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Paper provided by Hochschule Wismar, Wismar Business School in its series Wismar Discussion Papers with number 06/2012.

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Date of creation: 2012
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Handle: RePEc:zbw:hswwdp:062012
Contact details of provider: Web page: http://www.wi.hs-wismar.de/

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  1. Vogel,Harold L., 2010. "Financial Market Bubbles and Crashes," Cambridge Books, Cambridge University Press, number 9780521199674, May.
  2. Irène Andreou & Gilles Dufrénot & Alain Sand-Zantman & Aleksandra Zdzienicka-Durand, 2009. "A forewarning indicator system for financial crises: the case of six Central and Eastern European countries," Post-Print halshs-00372728, HAL.
  3. Gerdesmeier, Dieter & Roffia, Barbara & Reimers, Hans-Eggert, 2009. "Asset price misalignments and the role of money and credit," Working Paper Series 1068, European Central Bank.
  4. Adalid, Ramón & Detken, Carsten, 2007. "Liquidity shocks and asset price boom/bust cycles," Working Paper Series 0732, European Central Bank.
  5. Jan Babecký & Tomáš Havránek & Jakub Matìjù & Marek Rusnák & Kateøina Šmídková & Boøek Vašíèek, 2011. "Early Warning Indicators of Crisis Incidence: Evidence from a Panel of 40 Developed Countries," Working Papers IES 2011/36, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2011.
  6. Bussiere, Matthieu & Fratzscher, Marcel, 2006. "Towards a new early warning system of financial crises," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 953-973, October.
  7. Yucel, Eray, 2011. "A Review and Bibliography of Early Warning Models," MPRA Paper 32893, University Library of Munich, Germany.
  8. DETKEN Carsten & SMETS Frank, . "Asset Price Booms and Monetary Policy," EcoMod2003 330700042, EcoMod.
  9. Lawrence J. Christiano & Terry J. Fitzgerald, 1999. "The Band Pass Filter," NBER Working Papers 7257, National Bureau of Economic Research, Inc.
    • Lawrence J. Christiano & Terry J. Fitzgerald, 2003. "The Band Pass Filter," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 435-465, 05.
  10. Claudio Borio & Mathias Drehmann, 2009. "Assessing the risk of banking crises - revisited," BIS Quarterly Review, Bank for International Settlements, March.
  11. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
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