Vortrag
Forecasting the Fragility of the Banking and Insurance Sector

Kerstin Bernoth, Andreas Pick


14th Annual International Conference on Macroeconomic Analysis and International Finance
Rethymno, Griechenland, 27.05.2010 - 29.05.2010

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Abstract:
Linkages between banks and insurance companies are important when forecasting the fragility of the banking and insurance sectors. We propose a novel empirical framework that allows us to estimate unobserved linkages in panel data sets that contains observed regressors. We find that taking unobserved common factors into account reduces the root mean square forecasts error of firm specific forecasts by up to 11% and of system forecasts by up to 29% relative to a model based on observed variables only. Estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period.

Abstract

Linkages between banks and insurance companies are important when forecasting the fragility of the banking and insurance sectors. We propose a novel empirical framework that allows us to estimate unobserved linkages in panel data sets that contains observed regressors. We find that taking unobserved common factors into account reduces the root mean square forecasts error of firm specific forecasts by up to 11% and of system forecasts by up to 29% relative to a model based on observed variables only. Estimates of the factor loadings suggest that the correlation of financial institutions has been relatively stable over the forecast period.



JEL-Classification: C53;G21;G22
Keywords: Financial stability, financial linkages, banking, insurances, unobserved common factors
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