What Predicts Financial (In)Stability? A Bayesian Approach

40 Pages Posted: 21 Jun 2016

See all articles by Judith Eidenberger

Judith Eidenberger

Oesterreichische Nationalbank (OeNB)

Michael Sigmund

Oesterreichische Nationalbank (OeNB)

Benjamin Neudorfer

Oesterreichische Nationalbank (OeNB)

Ingrid Stein

Deutsche Bundesbank; European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: 2014

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 stress index

JEL Classification: G01, G28

Suggested Citation

Eidenberger, Judith and Sigmund, Michael and Neudorfer, Benjamin and Stein, Ingrid, What Predicts Financial (In)Stability? A Bayesian Approach (2014). Bundesbank Discussion Paper No. 36/2014, Available at SSRN: https://ssrn.com/abstract=2797014 or http://dx.doi.org/10.2139/ssrn.2797014

Judith Eidenberger (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

Michael Sigmund

Oesterreichische Nationalbank (OeNB) ( email )

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

Benjamin Neudorfer

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
1090 Vienna
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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