An Early Warning System for Systemic Risks

51 Pages Posted: 7 Mar 2018

See all articles by Gianni De Nicolo

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 1, 2018

Abstract

This paper formulates an Early Warning System (EWS) for systemic risks based on forecasts of Expected Shortfalls (ES) of real and financial indicators integrated with structural stress-tests via a structural VAR. The EWS delivers early warning signals as probabilities of tail risk realizations, as well as measures of the incidence of tail risks as ES forecasts conditional on configurations of structural shocks. Using monthly data of the G-7 economies for the period 1984:01-2016:12, the EWS is shown to have significant out-of-sample forecasting power, with its usefulness as an early warning system demonstrated through a pseudo-real-time application.

Keywords: Systemic Risks, VAR, Quantile Auto-regressions, Quantile curves

JEL Classification: C5, E3, G2

Suggested Citation

De Nicolo, Gianni, An Early Warning System for Systemic Risks (March 1, 2018). Available at SSRN: https://ssrn.com/abstract=3132520 or http://dx.doi.org/10.2139/ssrn.3132520

Gianni De Nicolo (Contact Author)

Johns Hopkins University - Carey Business School ( email )

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Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

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Munich, DE-81679
Germany

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