Leading indicators of financial stress: New evidence |
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| Affiliation: | 1. DG Economic and Financial Affairs, European Commission, 1049 Brussels, Belgium;2. Czech National Bank, Prague, Czech Republic;3. De Nederlandsche Bank, Amsterdam, The Netherlands;4. University of Groningen, The Netherlands;5. CESifo, Munich, Germany;6. Institute of Economic Studies, Charles University in Prague, Czech Republic;1. Ozyegin University, Istanbul, Turkey;2. World Bank, Washington, DC, United States;3. School of Banking and Finance, University of International Business and Economics, Beijing 100029, China;4. European Banking Center, Tilburg, The Netherlands;5. Rotterdam School of Management, Rotterdam, The Netherlands;6. CEPR, London, United Kingdom;1. Department of Economics, Universidade Federal do Rio Grande do Sul (UFRGS), Brazil;2. Department of Economics, Universidade do Vale do Rio dos Sinos (UNISINOS), Brazil;1. Department of Economics, University of Pretoria, Pretoria 0002, South Africa;2. STRATVEST, Johannesburg, South Africa;3. Montpellier Business School, Montpellier, France;4. College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA;5. School of Business and Economics, Loughborough University, Leicestershire LE11 3TU, UK;1. Czech National Bank (CNB), Czech Republic;2. Institute of Economic Studies, Charles University, Prague, Czech Republic;3. European Insurance and Occupational Pensions Authority (EIOPA), Germany |
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| Abstract: | This paper examines which variables have predictive power for financial stress in 25 OECD countries, using a recently constructed financial stress index (FSI). First, we employ Bayesian model averaging to identify leading indicators of stress. Next, we use those indicators as explanatory variables in a panel model for all countries and in models at the individual country level. It turns out that panel models can hardly explain FSI dynamics. Although better results are achieved in country models, our findings suggest that (increases in) financial stress is (are) hard to predict out-of-sample despite the reasonably good in-sample performance of the models. |
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| Keywords: | Financial stress index Bayesian model averaging Early warning indicators |
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