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A1584
Title: Measuring financial cycle time Authors:  Marco Lombardi - Bank for International Settlements (Switzerland) [presenting]
Marek Raczko - Bank of England (United Kingdom)
Andrew Filardo - Bank for International Settlements (Switzerland)
Abstract: Motivated by the traditional business cycle approach, we explore cyclical similarities in financial conditions over time in order to improve our understanding of financial cycles. Looking back at 120 years of data, we find that financial cycles exhibit behaviour characterised by recurrent, endogenous swings in financial conditions, which result in costly booms and busts. Yet the recurrent nature of such swings may not appear so obvious when looking at conventionally plotted time-series data (that is, measured in calendar time). Using a pioneering framework, we offer a new statistical characterisation of the financial cycle using a continuous-time autoregressive model with time deformation, and test for systematic differences between calendar and financial cycle time. We find the time deformation to be statistically significant, and associated with levels of long-term real interest rates, inflation volatility and the perceived riskiness of the macro-financial environment. We conclude that past financial cycles do not appear to be a series of unique events but rather recurrent, inherent features of financially liberalised, free-market economies.