Mapping the state of financial stability

Peter Sarlin*, Tuomas A. Peltonen

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

The aim of this paper is to introduce modern mapping techniques to the finance community. Mapping techniques provide means for representing high-dimensional data on low-dimensional displays. This paper lays out a methodology called the Self-Organizing Financial Stability Map (SOFSM) based upon data and dimensionality reduction that can be used for mapping the state of financial stability and visualizing potential sources of systemic risks. Besides of its visualization capabilities, the SOFSM can be used as an early-warning model that can be calibrated according to policymakers' preferences between missing systemic financial crises and issuing false alarms. An application of the SOFSM to the recent global financial crisis shows that it performs on par with a statistical benchmark model and correctly calls the crises that started in 2007 in the United States and the euro area.

Original languageEnglish
Peer-reviewed scientific journalJournal of International Financial Markets, Institutions & Money
Volume26
Issue number1
Pages (from-to)46-76
Number of pages31
ISSN1042-4431
DOIs
Publication statusPublished - 10.2013
MoE publication typeA1 Journal article - refereed

Keywords

  • 511 Economics
  • Mapping techniques
  • Prediction
  • Self-Organizing Financial Stability Map (SOFSM)
  • Systemic financial crisis
  • Systemic risk
  • Visualization

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