Seminar - "An Early Warning Model for Financial Stress Events"
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Seminar - "An Early Warning Model for Financial Stress Events"
DateandTime: 2014-06-24 14:23:11

Speaker: Li Fuchun, Financial Stability Department, Bank of Canada

Date: June 30, 2014

Time: 3:00 p.m.

Location: Room 401, Run Run Shaw Science Building, Central Campus

Sponsor: Center for Economic Research of Shandong University



The objective of this paper is to propose an early warning system that can predict the likelihood of occurrence of financial stress events within a given period of time. To achieve this goal, the signal extraction approach proposed by Kaminsky, Lizondo and Reinhart (1998) is used to monitor the evolution of a number of economic indicators that tend to exhibit an unusual behavior in the periods preceding a financial stress event. Based on the individual indicators, we propose three different composite indicators, the summed composite indicator, the extreme composite indicator, and the weighted composite indicator. In-sample forecasting results indicate that the three composite indicators are useful tools for predicting financial stress events.  The out-of-sample forecasting results suggest that for the most countries including Canada, the weighted composite indicator performs better than the two others across all criteria considered.



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