TY - JOUR
T1 - Nowcasting and forecasting global financial sector stress and credit market dislocation
AU - Koopman, S.J.
AU - Lucas, A.
AU - Schwaab, B.
PY - 2014
Y1 - 2014
N2 - We introduce a new international model for the systematic distress risk of financial institutions from the US, the European Union, and the Asia-Pacific region. Our proposed dynamic factor model can be represented as a nonlinear, non-Gaussian state space model with parameters that we estimate using Monte Carlo maximum likelihood methods. We construct measures of global financial sector risk and of credit market dislocation, where credit market dislocation is defined as a significant and persistent decoupling of the credit risk cycle from macro-financial fundamentals in one or more regions. We show that, in the past, such decoupling has preceded episodes of systemic financial distress. Our new measure provides a risk-based indicator of credit conditions, and as such, complements earlier quantity-based indicators from the literature. In an extensive comparison with such quantity-based systemic risk indicators, we find that the behaviour of the new indicator is competitive with that of the best quantity-based indicators. © 2013 International Institute of Forecasters.
AB - We introduce a new international model for the systematic distress risk of financial institutions from the US, the European Union, and the Asia-Pacific region. Our proposed dynamic factor model can be represented as a nonlinear, non-Gaussian state space model with parameters that we estimate using Monte Carlo maximum likelihood methods. We construct measures of global financial sector risk and of credit market dislocation, where credit market dislocation is defined as a significant and persistent decoupling of the credit risk cycle from macro-financial fundamentals in one or more regions. We show that, in the past, such decoupling has preceded episodes of systemic financial distress. Our new measure provides a risk-based indicator of credit conditions, and as such, complements earlier quantity-based indicators from the literature. In an extensive comparison with such quantity-based systemic risk indicators, we find that the behaviour of the new indicator is competitive with that of the best quantity-based indicators. © 2013 International Institute of Forecasters.
U2 - 10.1016/j.ijforecast.2013.10.004
DO - 10.1016/j.ijforecast.2013.10.004
M3 - Article
SN - 0169-2070
VL - 30
SP - 741
EP - 758
JO - International Journal of Forecasting
JF - International Journal of Forecasting
IS - 3
ER -