Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis

25 Pages Posted: 23 Aug 2005 Last revised: 18 May 2009

See all articles by Andrea Cipollini

Andrea Cipollini

University of Palermo - d/SEAS; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN)

George Kapetanios

King's College, London

Date Written: March 1, 2009

Abstract

In this paper we use principal components analysis to obtain vulnerability indicators able to predict financial turmoil. Probit modelling through principal components and also stochastic simulation of a Dynamic Factor model are used to produce the corresponding probability forecasts regarding the currency crisis events affecting a number of East Asian countries during the 1997-1998 period. The principal components model improves upon a number of competing models, in terms of out-of-sample forecasting performance.

Keywords: Financial contagion, dynamic factor model

JEL Classification: C32, C51, F34

Suggested Citation

Cipollini, Andrea and Kapetanios, George, Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis (March 1, 2009). Journal of Empirical Finance, Vol. 16, No. 2, 2009. Available at SSRN: https://ssrn.com/abstract=786845 or http://dx.doi.org/10.2139/ssrn.786845

Andrea Cipollini (Contact Author)

University of Palermo - d/SEAS ( email )

Viale delle Scienze, edificio 13
Palermo, 90124
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics ( email )

Viale Berengario 51
41100 Modena, Modena 41100
Italy

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Center for Research in Banking and Finance (CEFIN) ( email )

via Berengario 51
Modena, modena I-41100
Italy

George Kapetanios

King's College, London ( email )

30 Aldwych
London, WC2B 4BG
United Kingdom
+44 20 78484951 (Phone)

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