How to predict financial stress? An assessment of Markov switching models

Este documento predice fases del ciclo financiero mediante la combinación de un Medida de tensión en un marco de conmutación de Markov.
  • 24 Mayo 2017

Por Thibaut Duprey y Benjamin Klaus

ECB Working Paper No 2057 / May 2017

Abstract

This paper predicts phases of the financial cycle by combining a continuous financial stress measure in a Markov switching framework. The debt service ratio and property market variables signal a transition to a high financial stress regime, while economic sentiment indicators provide signals for a transition to a tranquil state. Whereas the in-sample analysis suggests that these indicators can provide an early warning signal up to several quarters prior to the respective regime change, the out-of-sample findings indicate that most of this performance is due to the data gathered during the global financial crisis. Comparing the prediction performance with a standard binary early warning model reveals that the MS model is outperforming in the vast majority of model specifications for a horizon up to three quarters prior to the onset of financial stress.

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