How to predict financial stress?: FB3-5/2017-32E-PDF

An assessment of Markov switching models /

"This paper predicts phases of the financial cycle by using a continuous financial stress measure in a Markov switching framework. The debt service ratio and property market variables signal a transition to a high financial stress regime, while economic sentiment indicators provide signals for a transition to a tranquil state. Whereas the in-sample analysis suggests that these indicators can provide an early warning signal up to several quarters prior to the respective regime change, the out-of-sample findings indicate that most of this performance is owing to the data gathered during the global financial crisis. Comparing the prediction performance with a standard binary early warning model reveals that the Markov switching model is outperforming the vast majority of model specifications for a horizon up to three quarters prior to the onset of financial stress."--Abstract, p. ii.

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Department/Agency Bank of Canada.
Title How to predict financial stress?
Subtitle An assessment of Markov switching models /
Series Title Bank of Canada staff working paper,
Publication Type Series - View Master Record
Language [English]
Format Electronic
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Note "July 2017."
Date 2017.
Number of Pages ii, 46 p.
Catalogue Number
  • FB3-5/2017-32E-PDF
Subject Terms Economic analysis