Assessing systemic risks and predicting systemic events

Bubbles and Crises: The Role of House Prices and Credit

“…We also find that both a larger house price-to-income and non-core funding ratio gap increases the likelihood of a crisis. These results are in line with Borio and Lowe (2004), Alessi and Detken (2011), Drehmann et al (2011), Schularick and Taylor (2012), Behn et al (2013), LoDuca and Peltonen (2013) and Hahm et al (2013). It is reassuring that similar results may be established using a different information set.…”

“…These are typically constructed on the basis of GDP weights, or as a simple arithmetic average of these measures in some "important economies" (see e.g. Alessi and Detken (2011), Behn et al (2013) and LoDuca and Peltonen (2013)). A drawback with this approach is that not all countries are equally interconnected, and that these interlinkages may change over time.…”

Supervising System Stress in Multiple Markets

“…We start with the broad premise that an FSI as a measure of financial stress assesses the latent level of pressure in a financial system. 2 Systemic financial stress has also been interpreted as measure of excitation in a financial system [12], a measure of imbalance between demand and supply of financial goods [11,13], or as a measure of deviations from long term trends (pressure) in the markets [14]. The financial system is considered to consist of financial intermediaries and financial markets [15,16].…”

“…Somers' D is a broad metric that shows the degree to which a low rating within the system contains excess stress events. 11 …”

“…A measurement tool which supports the ability to continuously identify and analyze financial system conditions would alleviate the information obstacle faced by supervisors-those critically watching financial markets. 1 Recent research contributions [4][5][6][7][8][9][10][11] to financial stress measurement show a range of supervisory motivations in a common pursuit of a financial stress index (FSI) as a measure of the financial system's state. For example, Hatzius et al [4] and Brave and Butters [5] attempt to monitor and forecast economic activity while differentiating financial stress from cyclical economic activity.…”