Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/148128
Authors: 
Li, Fuchun
Xiao, Hongyu
Year of Publication: 
2016
Series/Report no.: 
Bank of Canada Staff Working Paper 2016-21
Abstract: 
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.
Subjects: 
Financial stability
Econometric and statistical methods
JEL: 
C12
C14
G01
G17
Document Type: 
Working Paper

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