Predicting Financial Crises: The Role of Asset Prices
IMF Working Papers, August 4, 2023
Source details
- Canonical URL
- Predicting Financial Crises: The Role of Asset Prices
Other formats
Bibliographic details
- Authors: Tristan Hennig, Plamen K Iossifov, Richard Varghese
- Published: August 4, 2023
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400248498.001
Overview
- Objective: Explore the early warning properties of a composite indicator that summarizes signals from a range of asset price growth and asset price volatility indicators to capture mispricing of risk in asset markets.
- Sample: quarterly panel of 108 advanced and emerging economies over 1995-2017.
- Core result: The combination of rapid asset price growth and low asset price volatility is a good predictor of future financial crises.
Data and Methodology
- Indicator composition: combines asset price growth and asset price volatility measures to detect mispricing of risk.
- Frequency and scope: quarterly data; 108 economies; sample period 1995-2017.
- Prediction horizon: focuses on probability of entering a crisis within the next three years.
- Comparative benchmarks: contrasted with credit-based early warning metrics.
- Evaluation metrics referenced: ROC (implied by keywords).
Key Findings
- Elevated values of the composite indicator significantly increase the probability of entering a crisis within the next three years relative to normal times when the indicator is not elevated.
- The asset-price-based indicator outperforms credit-based early warning metrics.
- The result is robust across:
- prediction horizons,
- methodological choices,
- income groups (advanced and emerging economies).
Implications for Policymakers
- Measures based on asset prices can offer critical information about systemic risk levels to policymakers.
- Monitoring rapid asset price growth together with low asset price volatility can provide early warning signals of elevated systemic risk.
Content in this bundle
- Working Paper