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10 Financial Crisis and Stock Market Crash Warning Signs

Last update on: Mar 14 2020

This article discusses warnings signs of financial crises. It says the conventional wisdom that high volatility is a warning sign is wrong. Instead, it says the period we just passed through might have given a warning sign of an upcoming crisis.

One of the key tools is early warning indicators of crises, which gained some prominence after the Asian crisis of 1998. Those in place in 2008 did not work well (Rose and Spiegel 2009), and to rectify that, a variety of indicators have been proposed.

At the risk of oversimplification, we can classify this work in two main categories. First is a group of early warning indicators that are purely data-driven, and based on market data indicators, such as stock prices, volatility, and CDS spreads. The second category uses economic theory to guide the indicator design, looking more fundamentally at how risk emerges in the first place.

 

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