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Mapping the State of Financial Stability

Peter Sarlin

Hanken School of Economics; RiskLab Finland

Tuomas A. Peltonen

European Central Bank (ECB)

July 27, 2011

BOFIT Discussion Paper No. 18/2011

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.

Number of Pages in PDF File: 44

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

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

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Date posted: August 22, 2011  

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

Contact Information

Peter Sarlin (Contact Author)
Hanken School of Economics
PO Box 479
FI-00101 Helsinki
RiskLab Finland ( email )
Turku, 20520
HOME PAGE: http://risklab.fi/people/peter/
Tuomas A. Peltonen
European Central Bank (ECB) ( email )
Sonnemannstrasse 22
Frankfurt am Main, 60314

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