What Predicts Financial (In)Stability? A Bayesian Approach

Deutsche Bundesbank Discussion Paper 36/2014

44 Pages Posted: 15 Jan 2015

See all articles by Judith Eidenberger

Judith Eidenberger

Oesterreichische Nationalbank (OeNB)

Benjamin Neudorfer

Oesterreichische Nationalbank (OeNB)

Michael Sigmund

Oesterreichische Nationalbank (OeNB)

Ingrid Stein

Deutsche Bundesbank; European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: January 14, 2015

Abstract

This paper contributes to the literature on early warning indicators by applying a Bayesian model averaging approach. Our analysis, based on Austrian data, is carried out in two steps: First, we construct a quarterly financial stress index (AFSI) quantifying the level of stress in the Austrian financial system. Second, we examine the predictive power of various indicators, as measured by their ability to forecast the AFSI. Our approach allows us to investigate a large number of indicators. The results show that excessive credit growth and high returns of banks’ stocks are the best early warning indicators. Unstable funding (as measured by the loan to deposit ratio) also has a high predictive power.

Keywords: Financial crisis, early warning indicators, government policy and regulation, financial

JEL Classification: G01 G28

Suggested Citation

Eidenberger, Judith and Neudorfer, Benjamin and Sigmund, Michael and Stein, Ingrid, What Predicts Financial (In)Stability? A Bayesian Approach (January 14, 2015). Deutsche Bundesbank Discussion Paper 36/2014, Available at SSRN: https://ssrn.com/abstract=2549538 or http://dx.doi.org/10.2139/ssrn.2549538

Judith Eidenberger

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

Benjamin Neudorfer

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

Michael Sigmund (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Ingrid Stein

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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