Title: On unit root methods to predict financial crises
Authors: Timo Virtanen - University of Turku (Finland)
Eero Tolo - Bank of Finland (Finland) [presenting]
Matti Viren - University of Turku (Finland)
Katja Taipalus - Bank of Finland (Finland)
Abstract: Cross-country evidence is provided for the performance of unit-root-based early warning systems in ex-ante prediction of financial crises in 15 EU countries over the past three decades. We find, especially high performance for time series, that are explicitly related to debt, which issue signals a few years in advance of a crisis. Combining signals from multiple time series further improves the predictions. Our results suggest an early warning tool based on unit root methods provides a convenient accessory for financial stability supervision.