Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/175681
Authors: 
Duprey, Thibaut
Klaus, Benjamin
Year of Publication: 
2017
Series/Report no.: 
ECB Working Paper 2057
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.
Subjects: 
Time-varying transition probability Markov switching model
early warning model
continuous coincident financial stress measure
JEL: 
C54
G01
G15
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-2779-6
Document Type: 
Working Paper
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