IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v26y2013icp46-76.html
   My bibliography  Save this article

Mapping the state of financial stability

Author

Listed:
  • Sarlin, Peter
  • Peltonen, Tuomas A.

Abstract

The aim of this paper is to introduce modern mapping techniques to the finance community. Mapping techniques provide means for representing high-dimensional data on low-dimensional displays. This paper lays out a methodology called the Self-Organizing Financial Stability Map (SOFSM) based upon data and dimensionality reduction that can be used for mapping the state of financial stability and visualizing potential sources of systemic risks. Besides of its visualization capabilities, the SOFSM can be used as an early-warning model that can be calibrated according to policymakers’ preferences between missing systemic financial crises and issuing false alarms. An application of the SOFSM to the recent global financial crisis shows that it performs on par with a statistical benchmark model and correctly calls the crises that started in 2007 in the United States and the euro area.

Suggested Citation

  • Sarlin, Peter & Peltonen, Tuomas A., 2013. "Mapping the state of financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 46-76.
    • Handle: RePEc:eee:intfin:v:26:y:2013:i:c:p:46-76
    DOI: 10.1016/j.intfin.2013.05.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443113000243
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.intfin.2013.05.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Bystrom, Hans N. E., 2004. "The market's view on the probability of banking sector failure: cross-country comparisons," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(5), pages 419-438, December.
    2. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    3. repec:zbw:bofitp:2011_002 is not listed on IDEAS
    4. Sarlin, Peter, 2013. "On policymakers’ loss functions and the evaluation of early warning systems," Economics Letters, Elsevier, vol. 119(1), pages 1-7.
    5. Andrew Berg & Eduardo Borensztein & Catherine Pattillo, 2005. "Assessing Early Warning Systems: How Have They Worked in Practice?," IMF Staff Papers, Palgrave Macmillan, vol. 52(3), pages 1-5.
    6. Fioramanti, Marco, 2008. "Predicting sovereign debt crises using artificial neural networks: A comparative approach," Journal of Financial Stability, Elsevier, vol. 4(2), pages 149-164, June.
    7. Peltonen, Tuomas A., 2006. "Are emerging market currency crises predictable? A test," Working Paper Series 571, European Central Bank.
    8. Marcello Pericoli & Massimo Sbracia, 2003. "A Primer on Financial Contagion," Journal of Economic Surveys, Wiley Blackwell, vol. 17(4), pages 571-608, September.
    9. Kremer, Manfred & Lo Duca, Marco & Holló, Dániel, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series 1426, European Central Bank.
    10. Alessi, Lucia & Detken, Carsten, 2011. "Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity," European Journal of Political Economy, Elsevier, vol. 27(3), pages 520-533, September.
    11. Illing, Mark & Liu, Ying, 2006. "Measuring financial stress in a developed country: An application to Canada," Journal of Financial Stability, Elsevier, vol. 2(3), pages 243-265, October.
    12. repec:ecb:ecbwps:20111426 is not listed on IDEAS
    13. Demyanyk, Yuliya & Hasan, Iftekhar, 2010. "Financial crises and bank failures: A review of prediction methods," Omega, Elsevier, vol. 38(5), pages 315-324, October.
    14. Ismael E Arciniegas Rueda & Fabio Arciniegas, 2005. "SOM-based Data Analysis of Speculative Attacks' Real Effects," International Finance 0507001, University Library of Munich, Germany.
    15. Claudio E. V. Borio & Philip Lowe, 2004. "Securing sustainable price stability: should credit come back from the wilderness?," BIS Working Papers 157, Bank for International Settlements.
    16. Bussiere, Matthieu & Fratzscher, Marcel, 2006. "Towards a new early warning system of financial crises," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 953-973, October.
    17. Detken, Carsten & Alessi, Lucia, 2009. "'Real time'early warning indicators for costly asset price boom/bust cycles: a role for global liquidity," Working Paper Series 1039, European Central Bank.
    18. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
    19. Mr. Stephan Danninger & Ms. Irina Tytell & Mr. Ravi Balakrishnan & Mr. Selim A Elekdag, 2009. "The Transmission of Financial Stress from Advanced to Emerging Economies," IMF Working Papers 2009/133, International Monetary Fund.
    20. Marco Lo Duca & Tuomas Peltonen, 2011. "Macrofinancial vulnerabilities and future financial stress: assessing systemic risks and predicting systemic events," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 82-88, Bank for International Settlements.
    21. Demirguc, Asli & Detragiache, Enrica, 2000. "Monitoring Banking Sector Fragility: A Multivariate Logit Approach," The World Bank Economic Review, World Bank, vol. 14(2), pages 287-307, May.
    22. Craig S. Hakkio & William R. Keeton, 2009. "Financial stress: what is it, how can it be measured, and why does it matter?," Economic Review, Federal Reserve Bank of Kansas City, vol. 94(Q II), pages 5-50.
    23. Jaume Puig-Forne & Mr. Ken Miyajima & Rebecca McCaughrin & Mr. Peter Dattels, 2010. "Can You Map Global Financial Stability?," IMF Working Papers 2010/145, International Monetary Fund.
    24. Cardarelli, Roberto & Elekdag, Selim & Lall, Subir, 2011. "Financial stress and economic contractions," Journal of Financial Stability, Elsevier, vol. 7(2), pages 78-97, June.
    25. Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sarlin, Peter & Peltonen, Tuomas A., 2013. "Mapping the state of financial stability," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 46-76.
    2. repec:zbw:bofitp:2011_018 is not listed on IDEAS
    3. Sarlin, Peter & Peltonen, Tuomas A., 2011. "Mapping the state of financial stability," BOFIT Discussion Papers 18/2011, Bank of Finland Institute for Emerging Economies (BOFIT).
    4. Marco Lo Duca & Tuomas Peltonen, 2011. "Macrofinancial vulnerabilities and future financial stress: assessing systemic risks and predicting systemic events," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 82-88, Bank for International Settlements.
    5. Markus Holopainen & Peter Sarlin, 2015. "Toward robust early-warning models: A horse race, ensembles and model uncertainty," Papers 1501.04682, arXiv.org, revised Apr 2016.
    6. Betz, Frank & Oprică, Silviu & Peltonen, Tuomas A. & Sarlin, Peter, 2014. "Predicting distress in European banks," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 225-241.
    7. Oet, Mikhail V. & Gramlich, Dieter & Sarlin, Peter, 2016. "Evaluating measures of adverse financial conditions," Journal of Financial Stability, Elsevier, vol. 27(C), pages 234-249.
    8. Truong, Chi & Sheen, Jeffrey & Trück, Stefan & Villafuerte, James, 2022. "Early warning systems using dynamic factor models: An application to Asian economies," Journal of Financial Stability, Elsevier, vol. 58(C).
    9. repec:zbw:bofitp:2011_002 is not listed on IDEAS
    10. Lo Luca, Marco & Peltonen, Tuomas, 2011. "Macro-financial vulnerabilities and future financial stress : Assessing systemic risks and predicting systemic events," BOFIT Discussion Papers 2/2011, Bank of Finland, Institute for Economies in Transition.
    11. Vašíček, Bořek & Žigraiová, Diana & Hoeberichts, Marco & Vermeulen, Robert & Šmídková, Kateřina & de Haan, Jakob, 2017. "Leading indicators of financial stress: New evidence," Journal of Financial Stability, Elsevier, vol. 28(C), pages 240-257.
    12. Zigraiova, Diana & Jakubik, Petr, 2015. "Systemic event prediction by an aggregate early warning system: An application to the Czech Republic," Economic Systems, Elsevier, vol. 39(4), pages 553-576.
    13. Diana Zigraiova & Petr Jakubik, 2014. "Systemic Event Prediction by Early Warning System," Working Papers IES 2014/01, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jan 2014.
    14. Peter Sarlin & Dorina Marghescu, 2011. "Neuro‐Genetic Predictions Of Currency Crises," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 18(4), pages 145-160, October.
    15. Lo Duca, Marco & Koban, Anne & Basten, Marisa & Bengtsson, Elias & Klaus, Benjamin & Kusmierczyk, Piotr & Lang, Jan Hannes & Detken, Carsten & Peltonen, Tuomas, 2017. "A new database for financial crises in European countries," ESRB Occasional Paper Series 13, European Systemic Risk Board.
    16. Layal MansourIshrakieh & Leila Dagher & Sadika El Hariri, 2020. "A financial stress index for a highly dollarized developing country : The case of Lebanon," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 20(2), pages 43-52.
    17. Lang, Jan Hannes & Peltonen, Tuomas A. & Sarlin, Peter, 2018. "A framework for early-warning modeling with an application to banks," Working Paper Series 2182, European Central Bank.
    18. Kamila Tomczak, 2023. "Transmission of the 2007–2008 financial crisis in advanced countries of the European Union," Bulletin of Economic Research, Wiley Blackwell, vol. 75(1), pages 40-64, January.
    19. Sun, Lixin & Huang, Yuqin, 2016. "Measuring the instability of China's financial system: Indices construction and an early warning system," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 10, pages 1-41.
    20. Mansour Ishrakieh, Layal & Dagher, Leila & El Hariri, Sadika, 2018. "The Institute of Financial Economics Financial Stress Index (IFEFSI) for Lebanon," MPRA Paper 116054, University Library of Munich, Germany.
    21. Mikkel Hermansen & Oliver Röhn, 2017. "Economic resilience: The usefulness of early warning indicators in OECD countries," OECD Journal: Economic Studies, OECD Publishing, vol. 2016(1), pages 9-35.
    22. Timothy Bianco & Dieter Gramlich & Mikhail V. Oet & Stephen J. Ong, 2012. "Financial stress index: a lens for supervising the financial system," Working Papers (Old Series) 12-37, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

    Mapping techniques; Self-Organizing Financial Stability Map (SOFSM); Systemic financial crisis; Systemic risk; Visualization; Prediction;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F01 - International Economics - - General - - - Global Outlook
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G01 - Financial Economics - - General - - - Financial Crises

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:26:y:2013:i:c:p:46-76. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.