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Predicting Financial Crises: Draw Probabilities as Leading Indicators

Journal: Athens Journal of Business & Economics (Vol.2, No. 3)

Publication Date:

Authors : ; ; ;

Page : 241-250

Keywords : Draw probabilities; Financial crisis; Risk analysis.;

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This paper explores the use of sequential draw probabilities for two "players", banking and enterprise sectors, to predict impending financial crisis. Financial crises typically follow cyclical patterns where positive and negative turns are generated by underlying economic mechanisms. We envisage risk transfer between the financial sector and the real economy as one such mechanism. An analysis of draw probabilities calculated for differences in essential measures of fiscal risk, from the banking and enterprise sectors, reveals a intriguing phenomenon that may be used to assess the proximity (or remoteness) and possible intensity of financial crisis. Specifically, we provide evidence that draw probabilities comparing the competitive differences in Return of Equity between banks and enterprises, can be helpful in gauging asymmetry of risk; where such asymmetry has, historically, preceded grim financial outcomes.

Last modified: 2016-05-18 21:38:03