Predicting Financial Crises: The Role of Asset Prices
Tristan Hennig (International Monetary Fund), et al.
August 2023
We explore the early warning properties of a composite indicator which summarizes signals from a range of asset price growth and asset price volatility indicators to capture mispricing of risk in asset markets. Using a quarterly panel of 108 advanced and emerging economies over 1995-2017, we show that the combination of rapid asset price growth and low asset price volatility is a good predictor of future financial crises. Elevated levels of our indicator significantly increase the probability of entering a crisis within the next three years relative to normal times when the indicator is not elevated. The indicator outperforms credit-based early warning metrics, a result robust to prediction horizons, methodological choices, and income groups. Our results are consistent with the idea that measures based on asset prices can offer critical information about systemic risk levels to policymakers.
Daily Archives: August 31, 2023
Macro Briefing: 31 August 2023
* US GDP for Q2 revised down to +2.1% from +2.4%
* China manufacturing sector contracts 5th month in August via PMI survey
* One of China’s biggest property developers warns of possible default on debt
* Eurozone inflation is higher than expected in August
* US pending home sales in July post gain for second straight month
* Hiring by US companies slows sharply in August via ADP data:
