Work detail

mic Risks Assessment and Systemic Events Prediction: Early Warning System Design for the Czech Republic

Author: Mgr. Diana Žigraiová
Year: 2013 - summer
Leaders: doc. PhDr. Ing. Ing. Petr Jakubík Ph.D. Ph.D.
Consultants:
Work type: Finance, Financial Markets and Banking
Masters
Language: English
Pages: 129
Awards and prizes: M.A. with distinction from the Dean of the Faculty of Social Sciences for an excellent state-final examination performance.
Link:
Abstract: This thesis develops an early warning system framework for
assessing systemic risks and for predicting systemic events, i.e.
periods of extreme financial instability with potential real costs, over
the short horizon of six quarters and the long horizon of twelve
quarters on the panel of 14 countries both advanced and developing.
Firstly, Financial Stress Index is built aggregating indicators from
equity, foreign exchange, security and money markets in order to
identify starting dates of systemic financial crises for each country in
the panel. Secondly, the selection of early warning indicators for
assessment and prediction of systemic risks is undertaken in a twostep
approach; relevant prediction horizons for each indicator are
found by means of a univariate logit model followed by the
application of Bayesian model averaging method to identify the most
useful indicators. Next, logit models containing useful indicators only
are estimated on the panel while their in-sample and out-of-sample
performance is assessed by a variety of measures. Finally, having
applied the constructed EWS for both horizons to the Czech
Republic it was found that even though models for both horizons
perform very well in-sample, i.e. both predict 100% of crises, only the
long model attains the maximum utility of 0,5 as well as maximizes
area under Receiver Operating Characteristics curve which measures
the quality of the forecast.

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ČSOB
Deloitte
McKinsey & Company

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CRIF