Systemic Risk Diagnostics: Coincident Indicators and Early Warning Signals

38 Pages Posted: 19 Apr 2011

See all articles by Bernd Schwaab

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Andre Lucas

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: April 4, 2011

Abstract

We propose a novel framework to assess financial system risk. Using a dynamic factor framework based on state-space methods, we construct coincident measures (‘thermometers’) and a forward looking indicator for the likelihood of simultaneous failure of a large number of financial intermediaries. The indicators are based on latent macro-financial and credit risk components for a large data set comprising the U.S., the EU-27 area, and the respective rest of the world. Credit risk conditions can significantly and persistently de-couple from macro-financial fundamentals. Such decoupling can serve as an early warning signal for macro-prudential policy.

Keywords: financial crisis, systemic risk, credit portfolio models, frailty-correlated defaults, state space methods

JEL Classification: G21, C33

Suggested Citation

Schwaab, Bernd and Koopman, Siem Jan and Lucas, Andre, Systemic Risk Diagnostics: Coincident Indicators and Early Warning Signals (April 4, 2011). ECB Working Paper No. 1327, Available at SSRN: https://ssrn.com/abstract=1802346 or http://dx.doi.org/10.2139/ssrn.1802346

Bernd Schwaab (Contact Author)

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Andre Lucas

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31 20 598 6039 (Phone)
+31 20 598 6020 (Fax)

HOME PAGE: http://personal.vu.nl/a.lucas

Tinbergen Institute

Roetersstraat 31
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.tinbergen.nl

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