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Duprey, Thibaut
Klaus, Benjamin
Year of Publication: 
Series/Report no.: 
Bank of Canada Staff Working Paper 2017-32
This paper predicts phases of the financial cycle by using 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 owing to the data gathered during the global financial crisis. Comparing the prediction performance with a standard binary early warning model reveals that the Markov switching model is outperforming the vast majority of model specifications for a horizon up to three quarters prior to the onset of financial stress.
Business fluctuations and cycles
Central bank research
Econometric and statistical methods
Financial markets
Financial stability
Financial system regulation and policies
Monetary and financial indicators
Document Type: 
Working Paper
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