Early warning of financial stress events: A credit-regime-switching approach

Arbeitspapier

We propose an early warning model for predicting the likelihood of a financial stress event for a given future time, and examine whether credit plays an important role in the model as a non-linear propagator of shocks. This propagation takes the form of a threshold regression in which a regime change occurs if credit conditions cross a critical threshold. The in-sample and out-of-sample forecasting performances are encouraging. In particular, the out-of-sample forecasting results suggest that the model based on the credit-regime-switching approach outperforms the benchmark models based on a linear regression and signal extraction approach across all forecasting horizons and all criteria considered.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2016-21

Classification and Topics

• Classification: Wirtschaft ; Hypothesis Testing: General ; Semiparametric and Nonparametric Methods: General ; Financial Crises ; Financial Forecasting and Simulation
• Subject: Financial stability ; Econometric and statistical methods

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Li, Fuchun ; Xiao, Hongyu
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2016

Further information

• DOI: doi:10.34989/swp-2016-21
• Handle: http://hdl.handle.net/10419/148128
• Last update: 10.03.2025, 11:43 AM CET