Alarm index for institutional bank runs

Since the insolvency of Lehman Brothers brought the global financial system to the brink of collapse in 2008, there is again a strong interest in properly understanding liquidity risks and the triggers of liquidity crises. Econophysicists recently developed an alarm index for institutional bank runs (IBRs) based on the log‐periodic power law. The key innovation of this alarm index is that it shall measure the speculative interactions among professional creditors that can culminate in IBRs. The paper at hand extends this line of research, in particular, by applying new critical parameter ranges that were recently derived directly from credit default swap (CDS) spreads of defaulted banks. The better performance of the revised alarm index in comparison with the originally proposed alarm index underpins the hypothesis that the CDS market belongs to a different universality class than, for example, the stock market. Furthermore, the refined index outperforms a modification of the bank run probability index that was previously proposed in the financial literature. This result further confirms the hypothesis that—under certain circumstances—financial markets are driven by investors whose investment decisions critically depend on the actions of other investors.