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Entropy as Leading Indicator for Extreme Systemic Risk Events

Author

Listed:
  • Radu LUPU

    (The Bucharest University of Economic Studies; Institute for Economic Forecasting; Bucharest, Romania)

  • Iulia LUPU

    (Victor Slăvescu” Centre for Financial and Monetary Research, Bucharest, Romania)

  • Tanase STAMULE

    (The Bucharest University of Economic Studies, Bucharest, Romania)

  • Mihai ROMAN

    (The Bucharest University of Economic Studies, Bucharest, Romania)

Abstract

Ensuring financial stability is one of the main objectives of authorities supervising financial markets. Analyses of the extent to which critical destabilising events may materialise fuel their actions. Chief among these investigations is the attempt to identify leading indicators that could set forth early warning systems. This paper focuses on extreme systemic risk situations to document their dependence on market action present in the preceding time intervals. We use the N-BEATS model, which proved to be one of the best neural network tools to predict time series, detect anomalies (jumps) in the dynamics of CoVaR measures for the most liquid banks in the European markets, and measure the Shannon entropy of the power spectral density in samples that lead to these events. Employing several logistic regressions, we document the capacity of entropy to explain the realisation of these anomalies.

Suggested Citation

  • Radu LUPU & Iulia LUPU & Tanase STAMULE & Mihai ROMAN, 2022. "Entropy as Leading Indicator for Extreme Systemic Risk Events," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 58-73, December.
    • Handle: RePEc:rjr:romjef:v::y:2022:i:4:p:58-73
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    References listed on IDEAS

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    More about this item

    Keywords

    jumps; anomaly detection tools; early warning systems;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics

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