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Mapping the State of Financial Stability

44 Pages Posted: 22 Aug 2011  

Peter Sarlin

Hanken School of Economics; RiskLab Finland

Tuomas A. Peltonen

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: July 27, 2011

Abstract

The paper uses the Self-Organizing Map for mapping the state of financial stability and visualizing the sources of systemic risks on a two-dimensional plane as well as for predicting systemic financial crises. The Self-Organizing Financial Stability Map (SOFSM) enables a two-dimensional representation of a multidimensional financial stability space and thus allows disentangling the individual sources impacting on systemic risks. The SOFSM can be used to monitor macro-financial vulnerabilities by locating a country in the financial stability cycle: being it either in the pre-crisis, crisis, post-crisis or tranquil state. In addition, the SOFSM performs better than or equally well as a logit model in classifying in-sample data and predicting out-of-sample the global financial crisis that started in 2007. Model robustness is tested by varying the thresholds of the models, the policymaker’s preferences, and the forecasting horizon.

Keywords: systemic financial crisis, systemic risk, self-organizing maps, visualisation, prediction, macroprudential supervision

JEL Classification: E44, E58, F01, F37, G01

Suggested Citation

Sarlin, Peter and Peltonen, Tuomas A., Mapping the State of Financial Stability (July 27, 2011). BOFIT Discussion Paper No. 18/2011. Available at SSRN: https://ssrn.com/abstract=1914294 or http://dx.doi.org/10.2139/ssrn.1914294

Peter Sarlin (Contact Author)

Hanken School of Economics

PO Box 479
FI-00101 Helsinki
Finland

RiskLab Finland ( email )

Turku, 20520
Finland

HOME PAGE: http://risklab.fi/people/peter/

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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