44 Pages Posted: 22 Aug 2011
Date Written: July 27, 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.
Keywords: systemic financial crisis, systemic risk, self-organizing maps, visualisation, prediction, macroprudential supervision
JEL Classification: E44, E58, F01, F37, G01
Suggested Citation: 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