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A Peer-reviewed scientific articles/A1 Journal article (refereed), original research
      
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Can bubble theory foresee banking crises?, Journal of Financial Stability June (2018). Virtanen, Timo; Tölö, Eero; Virén, Matti; Taipalus, Katja


Category A Peer-reviewed scientific articles
Sub-category A1 Journal article (refereed), original research
auki Internal authors
Tölö Eero / Macroprudential Analysis Division
All authors as text Virtanen, Timo; Tölö, Eero; Virén, Matti; Taipalus, Katja 
Number of authors
Status Published
Year of publication 2018 
Date 21.02.2018 
Name of article Can bubble theory foresee banking crises? 
Name of journal Journal of Financial Stability
Volume of issue 36 
Number of issue June 
Pages 66-81 
Abstract We consider the effectiveness of unit root exuberance tests in predicting banking crises. Using a sample of 15 EU countries over the past three decades, our crisis dating follows the scheme of the European Systemic Risk Board. The exuberance indicators slightly outperform benchmark signaling and logit models. Variables based on credit- and debt-service are identified as better predictors than housing market variables, which in turn outperform stock market variables. The results corroborate the existing literature, which says financial crises are typically preceded by leveraged bubbles, and more specifically, that initial bubble signals from explosive growth in credit and asset prices are followed by a lift-off in debt-servicing costs as a financial crisis nears. The risk of financial crisis peaks just after the bubble bursts. Our results indicate that exuberance tests, which can be used in crisis prediction in a manner similar to conventional early warning models, may be readily incorporated into the toolkit of financial stability supervisors.
Free text descriptor in Finnish rahoitusmarkkinat; kriisit; pankkikriisit; ennusteet; indikaattorit 
Free text descriptor in English Financial crises; Unit root; Combination of forecasts 
JEL-codes G01; G14; G21 
ISSN / e-ISSN 1572-3089 
auki Internet addresses
Additional information Available online 21 February 2018
Open Access Not open