Probability Of Crisis Research Articles

Financial crisis probability measurement model

Methods. The research used the method of analysis and synthesis – to clarify the nature of modern financial crises, the method of grouping – to determine the types of financial crises, general and specific – to differentiate between different types of financial crises, econometric methods – to quantify the level of systemic risk in the financial sector that leads to the financial crisis. Results. Excessive credit growth, the main cause of financial crises, is reflected in the insufficient capitalization of the financial sector. The paper briefly reviews the theoretical and empirical studies on the developments in these markets around the financial crisis. Market-based measures of systemic risk, such as SRISK, which stands for systemic risk, allow monitoring of how such vulnerabilities emerge and progress in real time. Novelty. This paper presents a quantitative assessment of the level of systemic risk in the financial sector that leads to a financial crisis. The model builds on the theory that deleveraging will have a price impact and the greater the magnitude of the deleveraging, the more dangerous the adjustment. In its most extreme case, the real economy has restricted access to credit as the financial sector experiences a fire sale, thus endogenously generating a financial crisis. Practical value. In an econometric framework, the relationship between SRISK and severity of financial crisis for different developed countries is given. The paper focuses on financial crises characterized by disruptions in credit supply, the lower tail of which may be related to various factors. A report on the probability of a financial crisis is provided in real-time from an indication of excessive credit growth. The study shows the important role of the cross-border external effect of financial noncapitalization.

Real effective exchange rate misalignment and currency crisis in Iran

This study aimed to examine real effective exchange rate (REER) misalignment in Iran and its relation to the currency crisis. The behavioral equilibrium exchange rate was employed to calculate the equilibrium exchange rate (EER), and misalignment was obtained using the exchange rate deviation from the equilibrium value. Using the autoregressive distributed lag (ARDL) method and data from 1986 to 2019, the long-run relationship between macroeconomic fundamentals and REER was estimated. The results show that trade openness, rate of productivity growth in tradable good production, net foreign assets of the central bank, oil exports, and terms of trade significantly affected the EER. Estimation of misalignment and its relationship with the currency crisis show that in the years before the crisis, there was generally a significant overvaluation in several consecutive years; hence, exchange rate misalignment serves as a leading index to predict the probability of a currency crisis.

Bank lending behaviour and systemic banking crisis in Africa: The role of regulatory framework

AbstractWe examine how regulatory framework shapes the impact of bank lending behaviour on the probability of systemic banking crisis by using data from 52 African countries over the period 2006–2018. The study found that banks that lend beyond a certain level of threshold have the greater probability of causing a systemic banking crisis. The study provides empirical evidence in support of the argument that above average lending behaviour reduces the predicted probability of a systemic banking crisis in the presence of audit independence, at stringent–capital regulatory requirement, central bank independence and monetary policy framework.

Political regimes and financial crises

AbstractThis study investigates how democratic or autocratic regimes, their transitions, and durations, affect the probability of experiencing financial crises. The empirical strategy employs novel instruments and Lewbel's method to address potential endogeneity concerns. The results reveal that democratic transition reduces the probability of crises by around seven percent, whereas autocratic switchovers enhance the crises likelihood by twelve percent. The findings remain robust in presence of a number of heterogeneity checks, with alternative measures of crises indicators, and employing different proxy for democratic transition. Thus, institutions in transition countries could play important role in managing such financial upheavals.

Fiscal Crises: The Role of the Public Debt Investor Base and Domestic Financial Markets as Aggravating and Mitigating Factors

The paper evaluates the key drivers of fiscal crises in a sample of countries from all three income groups—advanced, emerging, and low-income countries, using fiscal crisis data recently developed by the IMF’s Fiscal Affairs Department. The empirical study focuses on three questions: (1) How does the composition of debtholders (domestic vs. foreign, resident vs. non-resident, or official vs. non-official) affect the probability of a fiscal crisis, after controlling for the level of public debt and other relevant variables?; (2) How does the development and size of the domestic financial sector affect the probability of a fiscal crisis?; and (3) How do changes in the debt level affect the probability of a fiscal crisis, for given compositions of the sovereign debt investor base and different levels of development and size of domestic financial markets? Our findings confirm the benefits of financial development, the danger of heavy reliance on a non-resident investor base, and also that emerging market economies have a lower debt carrying capacity compared to the full sample.

Capital ratios and banking crises in the European Union

We assess if capital ratios reduced the occurrence of banking crises in the European Union from 1998 to 2017. We use a Probit model and estimate the effect of two measures: the bank capital to total assets ratio and the bank regulatory capital to Risk Weighted Assets (RWA). We found that both measures affect negatively the probability of crisis. This result is robust to the exclusion of outliers, to the inclusion of various control variables for banking, financial and macroeconomic risks. Finally, we show that while the bank regulatory capital to RWA has always a negative effect on the probability of crisis, the bank capital to total assets ratio is only significant above a threshold, estimated between 10 ​% and 12 ​%.

Financial crisis prediction based on multilayer supervised network analysis

Financial crisis prediction is essential in preventing financial problems as its monitoring indicators help regulators judge the probability of future crises. In this context, the activities of the scientific community have been focused on the dynamics of single/multiple sequences and utilized unsupervised/supervised methods for financial crisis prediction. It is noteworthy that the cross-correlation between the risks of multiple economic entities makes financial network analysis paramount in crisis prediction. Focusing on this point, we propose a multilayer supervised network analysis (MSNA) method to train the multilayer network, and select the most suitable layer for financial crisis prediction. Specifically, we use 37 crucial stock market indices from 4 continents to create successive multilayer financial networks with 120-day windows and 1-day step by Pearson cross-correlation (PCC), variance decompositions (VD), transfer entropy (TE), minimum spanning tree (MST), directed MST (DMST), planar maximally filtered graph (PMFG) and directed PMFG (DPMFG) methods. Based on the multilayer network, we embed the graph neural network classification (GNNC) model and train the dynamic multilayer networks at each window scale (240,120, and 60 days). Finally, we conclude that the accuracy of the short window (60 days) is significantly higher than that of the long window. The network constructed by PCC with MST is the most suitable for short sequence (60 days) crisis prediction (AUC = 0.959), and the network constructed by TE with DMST is the most suitable for long sequence (240 days) crisis prediction (AUC = 0.772).

Banking regulation and banking crises Probability in european countries

The main hypothesis of the paper was the thesis that banking regulation is intended to minimize the probability of financial instability, including banking crises, which have long-lasting and destructive consequences for the economy.The practical aim of this investigation is to explore the impact of banking regulation instruments on the banking crisis probability. Despite a large and growing body of literature that has investigated the role of banking regulation in ensuring financial stability, only a few of them explored the aspect of this problem we are considering, and this constitutes the scientific novelty of the research.The results confirm the effectiveness of banking regulation in predicting periods of stability in banking systems.Based on the use of bibliometric analysis with the software tool VOSviewer v.1.6.10, the main patterns in the theory of banking regulation development have been identified. To conduct an empirical analysis, the author used a database of eleven European countries from 1998 to 2017, whose banking systems had manifestations of a systemic banking crisis. Binary modeling (logit model) was used as a scientific and methodological tool for statistical research. The conducted empirical analysis declared the need to tighten banking regulations in the field of non-performing loan control since it leads to an increase in the banking crisis probability. The results of binary modeling also emphasized the importance of macroeconomic and monetary factors, the neglect of which leads to the vulnerability of banking institutions and, consequently, to banking crises.An important conclusion of the analysis is that in order to minimize systemic banking crises, it is necessary to ensure the achievement of the target parameters of the main macroeconomic indicators, expressed in terms of the optimal level of inflation and annual GDP growth. The proposed binary model can be used to further study the causes of a banking crisis, as well as methodological and empirical clarification of the role of banking regulation in the probability of its occurrence.

Allostasis revisited: A perception, variation, and risk framework

The framework of allostasis, allostatic load and overload (i.e., stability through change) attempts to combine homeostasis processes in day-to-day responses of physiology and behavior. These include predictive changes in environment such as seasons, and facultative responses to perturbations. The latter can be severe, occur at any time, and may present considerable additional challenges to homeostasis. Hormonal cascades, such as the hypothalamo-pituitary-adrenal cortex (HPA) axis, play a key role in responses to perturbations across vertebrate taxa. Glucocorticoids have been implicated in these processes in relation to energy balance that plays a role in determining responses to energetic demand (allostatic load) and influencing subsequent physiology and behavior associated with coping. Circulating glucocorticoid levels are likely regulated in part based on an individual’s proximity to energetic crisis, identified as the perturbation resistance potential (PRP). In the model of allostatic load, PRP is quantified as the difference between available resources and all energetic costs of allostatic load such as daily routines, life history stages (breeding, migration, molt and so on), and the impact of environmental perturbations. PRP can change gradually or abruptly and may be reflected by spikes in blood hormone levels. The pattern of individual responsiveness to PRP may vary and has specific implications for the activation of mineralocorticoid vs glucocorticoid-type receptors, hormone metabolizing enzymes and other downstream factors in target tissues. However, PRP is a difficult metric to measure. Here, we examine the variety of cues that animals may use to inform them about the status of their PRP and probability of energetic crisis. We consider (1) elevation in glucocorticoids as an endocrine “decision,” and (2) error management strategies in evaluating responsiveness to cues that may reflect or predict an impending energetic crisis. The potential for differential receptor activation as well as further integrative “decisions” to determine the diverse and sometimes contradictory effects of receptor activation and its downstream actions are important to the consideration of error management. This perspective offers insight into the basis of intra- and inter-individual variability in responsiveness and opens an avenue toward improving compatibility of the allostasis model with more classical views on “stress”.

Has the Evergrande debt crisis rattled Chinese capital markets? A series of event studies and their implications

In response to the global concern of the Evergrande debt crisis, we document several findings of the crisis's contagion effect. First, although most real estate companies have strong financial fundamentals, the high default risk among large firms sends an alarming signal. Second, the spillover effect to peer developers is stronger in the credit market than in the stock market. Finally, the systemic financial risk of the banking sector remains low during the crisis. Overall, while there is a low probability of a wide-ranging financial crisis, a debt crisis in the real estate sector might be on the horizon.

Regulation, financial crises, and liberalization traps

This paper examines how financial regulation and institutional quality affect the probability of a banking crisis using a panel of 138 countries over the period 1996–2017. Our key inference is that the probability of a financial crisis fits an inverted U-shaped curve: it rises as regulation stringency moves from low to medium levels and falls from medium to high levels. Countries located in the intermediate level of regulatory stringency face more financial instability than either loosely or severely regulated countries, which are caught in a “liberalization trap” and a “regulation trap,” respectively. Institutional quality interacts significantly with the regulatory environment, implying a trade-off with regulatory stringency.

The political determinants of country crises

PurposeCountry crises can provoke damages to a country's economic activity and citizens in a way that will always demand a deeper understanding of their determinants. Political issues are commonly mentioned as an important factor boosting these crises. This paper investigates the political factors behind financial crises and recessions.Design/methodology/approachUsing variables from the ICRG rating system, logistic panel regressions are run to determine whether or not the political risk variables explain country crises.FindingsResults disclose the importance of socioeconomic conditions to financial crises and recessions with no influence from the political arena. Against expectations, political instability does not help to explain crises. Political risk ratings also show their importance, demonstrating that the higher is the risk, the higher is the probability of debt and currency crises occurrence.Originality/valueThe findings in this paper contribute to a growing literature of political risk and crises, enhancing the value of political risk assessment and increasing the application of its consequences.

Regulations and banking crisis: lessons from the African context

PurposeThis study aims to investigate the coordinated impact of regulations on the predicted probability of a banking crisis in Africa.Design/methodology/approachThe study used the dynamic panel instrumental variable probit regression model of 52 African economies over the period 2006 to 2018.FindingsThe authors observe that banking crisis is persistent for few years but dissipates in the long run. The results show that board mechanism and ownership control are important in reducing the likelihood of banking crisis. The authors found a negative impact of regulatory capital and monetary policy on the predicted probability of a banking crisis while regulatory quality was not strong in reducing the likelihood of banking crisis. There was also evidence to support that regulatory capital and monetary policy augment the negative impact of board mechanism and ownership control on the predicted probability of a banking crisis.Research limitations/implicationsThe limitation of the study is that it did not explore all measures of regulatory framework and how they impact banking crisis. However, it has an advantage of using alternative measures of regulations in a banking crisis probability model. Therefore, future studies should include other macro-prudential regulations, regulatory environments and supervision and observe how they are coordinated to reduce possible crisis in a robust methodological framework.Practical implicationsThe research has policy implications for monetary authorities and policymakers to set coordinated regulations through internal banking mechanisms that are relevant in sustaining banking system stability goals. Countries in Africa should strengthen their quality of regulation in such a way that it can play a strong and complementary role to a robust internal control mechanisms, so as to maintain stability in the banking system. In general, regulators and policymakers should design greater coordination of external and internal regulations through a single regulatory framework and a common resolution mechanism that make the banking system more robust in curbing possible crisis.Social implicationsThe policy implication of the study is to build banking confidence in the society.Originality/valueThis study analyses the interactions of different components of internal and external regulatory framework in helping to reduce the probability of a banking crisis in Africa.

Regulation and crises: A concave story

The paper develops a theoretical model showing a concave impact of regulation on the probability of a crisis, which is then tested by applying a non-linear Probit model, OLS estimates, and IV regressions to annual data from 138 countries over the period 1996–2017. The key result is that the probability of a financial crisis fits an inverted U-shaped curve. The latter rises as regulation tightens from low to medium levels and descends as regulatory strictness goes from medium to high levels. Countries located in the middle level of regulatory stringency are exposed to more financial instability than either low-regulation or high-regulation countries. The latter two groups of countries are caught in a “liberalization trap” and a “regulation trap,” respectively. Institutional quality interacts significantly with the regulatory environment, implying trade-offs between regulatory stringency and institutional quality.

Inflation targeting and financial crisis

ABSTRACT We study the average treatment effect of inflation targeting on the likelihood of financial crisis with a large panel of countries over 1980–2017. To address the self-selection problem of inflation targeting, we adopt propensity score matching. Various matching estimators show consistent evidence that inflation targeting has significantly reduced the probability of a financial crisis. When decomposing financial crisis into various types, the effects are pronounced for the banking crisis, inflation crisis, external debt crisis, and stock crash. Our results are largely unaltered to a battery of robustness checks when controlling for legal origins, governance quality, financial development, capital account openness, fiscal balance, debt-to-GDP ratio, financial regulations, and central bank independence. This paper suggests that price-stability-oriented monetary policy frameworks, such as inflation targeting, also have non-negligible ‘side effects’ on financial stability.

Building bridges: From the probability of a country crisis to a country risk assessment

Country risk is often misconceived, leading to misunderstanding and, consequently, misapplication. This paper aims to provide an alternative way to assess country risk, based on quantitative tools where the link between country crises, firms’ characteristics and country risk ratings are presented. This paper reviews the literature on country risk concepts and develops a theory for the impact of country risk on the real economy, in particular how the outcome, provoked by a country crisis, effects firms’ assets. A statistical model based on the probability of a crisis adjusted to firm idiosyncratic exposure to country risk is built with respect to the type of exposed asset. The proposed assumptions that country risk alone does not exist, and that country risk must be combined with the primary source of risk to be measured, are rooted in natural science concepts about vulnerability and hazard and are the essence of this paper. The model is forward looking based on the probabilities of the occurrence of countries’ crises, providing an economic foundation for the additional cost of capital that country risk represents. This methodology could provide additional help to investors and banks.

The reinvestment by multinationals as a capital flow: Crises, imbalances, and the cash-based current account

When the affiliate of a foreign corporation saves a dollar of its profits, the host country records it as an inflow of retained earnings foreign direct investment (REFDI). If invested, this dollar arithmetically generates a current account deficit, even though cash does not cross borders. This study explores the empirical macroeconomic of REFDI, which globally comprises half of FDI inflows. Using international capital flows (1980–2018), we show that REFDI behaves like national saving in its procyclicality. Unpacking FDI in the analysis also makes a difference for the investment cycle. Moreover, we decompose the long run saving-to-investment correlation, finding a role for REFDI in the Feldstein-Horioka puzzle. Adjusting the current account for REFDI matters since REFDI lowers the probability of macroeconomic crises and sudden stops. Overall, REFDI is stronger in countries receiving more FDI and it was also strong during the recent commodity boom. We are not challenging that the balance of payments works on nationality and accrual bases. However, our results suggest that the external balance assessment of countries should adjust for REFDI because it tends to have a different propensity to be invested and to build-up vulnerabilities.

Banking disclosure and banking crises in Africa: does board gender diversity play a role?

The paper aims to investigate the impact of board gender diversity in explaining the relationship between bank disclosure and the predicted probability of banking crises in Africa. The study employs robust panel estimates based on an aggregate dataset of banks in 42 African countries over the 2006–2018 periods. From the study, board gender diversity (more women on boards and the presence of women on boards) has a positive impact on information disclosure of banks. We find that board gender diversity and bank disclosure have the possibility of reducing a banking crisis. We observe that board gender diversity enhances the reductive effect of bank disclosure on a predicted probability of a banking crisis. The implication is that women on boards provide prudent decisions on financial information disclosure that significantly reduce the possibility of a banking crises in order to ensure stable banking systems.

РОЗПІЗНАВАННЯ КРИЗОВИХ ЯВИЩ ТА МЕТОДИКА ЇХ ВИЯВЛЕННЯ

The article considers the theoretical and methodological justification and grouping of existing methods for recognizing crisis phenomena and the possibilities of their detection. The study reveals that while examining existing methods and models for assessing bankruptcy and forecasting the crisis of agricultural producers, it was established that the discriminatory models based on linear dependence have limitations, which do not clearly reflect on the reliability of the crisis in agricultural enterprises due to the seasonal nature of their operations. Attention is paid to the use of logistic-regression models, which are based on the binary result and, accordingly, allow to obtain calculations with a higher probability, provides a higher probability of forecasts. It was found that as a result, the diagnosis of the crisis in the company should be carried out according to a clear algorithm. It is suggested that current system of crisis indicators at the enterprise is not fully focused on its early recognition. It reflects the inertial orientation of the planned economy to manage only the processes of consistent and "steady" development, while in a market economy, states of recession and rise, development and decline alternate. This dictates the need to develop new synthetic indicators in order to more accurately and timely determine the probability and timing of crises. Of great importance is not only the system of indicators that reflect the main signs of the crisis, but also the methodology of their design and practical use. In the current management mechanism, this is its weakest link, as the methodology of crisis recognition should permeate all aspects of this process: purpose, indicators, their use in situation analysis, the practical value of crisis prediction and more. The lack of unity in the interpretation of the essence on the concept of "crisis in the enterprise" makes it difficult to identify the crisis. The described set of methods indicates a variety of approaches to diagnosing the crisis in enterprises, but it is a priori impossible to say which of them is the most suitable for studying the problem in agricultural enterprises.

Risk contagion in financial markets based on copula model

Abstract Economic globalisation and the development of financial trade liberalisation lead to a higher probability of financial crises. At the same time, the occurrence of financial crises has a particular risk of contagion. Based on this research background, this paper constructs a dynamic Copula model. It demonstrates the application of this model in financial market risk management based on the correlation changes between the US stock market and the Chinese stock market before and after the financial crisis. The results show that the Standard & Poor’s Index and China before the crisis broke out There is a specific correlation between the stock markets, which shows that the financial crisis has affected both the Chinese and American stock markets. Therefore, risks in the financial market are contagious.