Jean Tirole, the famous French economist and winner of the Nobel Prize in Economics in 2014, wrote in his recent book "Economics for the Common Good": "Economists will always be more comfortable identifying the factors likely to lead to a crisis than predicting whether it will occur, or on what date (…). Just like epidemics and earthquakes financial crises are difficult to predict, but we can identify likely causes." Do you agree with him?
Dear Dr. Luburic! This question is of high relevance. So I looked up for research to be able to support my argument. Please find the documents I found enclosed. Based on my experience and recent research papers attached I do agree with Prof. Jean Tilore's statement. Still the evolution of science and the aim of research have always put predictiions at the forefront. These days AI, machine learning and digitalization in general facilitate better reaching the goals of predictive science. Yours sincerely, Bulcsu Szekely
Dear Bulcsu,
Thank you for your very interesting thoughts and articles. The models shown may offer a better understanding of the past crises and developments, although to what extent they will really be able to help predicting any future ones remains to be seen. Time will tell!
All the Best,
Radoica
If I may say so, and paraphrasing the quoted phrase, economists will always be more comfortable to identify factors that led to the previous major crisis...
Dear Ioannis,
Your thinking is very interesting and deserves further consideration. I generally agree with you.
Best Regards,
Radoica
By analyzing,
Yield curves-Inverted Yield Curve
This one sounds obtuse but it's actually very easy to track and almost always an indicator of lacking confidence in economic health. Very simply put, an inverted yield curve occurs when the yield (the return an investor in bonds receives) on bonds with a short duration exceeds the yield on bonds with a longer duration.
referring to indices such as- The VIX - is an index that is tied to market volatility using S&P 500 index options. Also known as the Chicago Board Options Exchange Volatility Index (CBOE VIX), it is one of those frequently talked about indicators of the market's anxiety and concern over short-term future market performance.
Looking at a chart of the VIX over the past 30 years, it's clear that it has experienced spikes that are coincident with recessions or market corrections
Market Cap to GDP- The way it works is that equities are overpriced when the total market cap (TMC) of all equities surpasses the value of GDP.
Unforeseen Catalysts
Dear Colleagues and Friends from RG, Anticipating (extent) the financial crisis is not easy. It is much easier to forecast the crisis by using advanced forecasting instruments, which in recent years have used the computerized advanced data processing technologies Industry 4.0, including Big Data Analytics technologies, learning machines, artificial intelligence, etc. Few entities operating on financial markets are able precisely, i.e. with a high probability, to forecast the date of the next financial crisis. As long as there are few entities, the level of precision of forecasting techniques and their level of accuracy may be high. Unfortunately, entities operating on financial markets, including e.g. investment banks and investment funds, which are able to accurately predict the emergence of the next national and / or global financial crisis with a high probability factor, are very few. So few that these entities usually do not include central institutions of the financial system, such as central banks. This thesis is confirmed by the facts from the institutional, systemic and procedural analysis of the sources of the global financial crisis of autumn 2008. This global financial crisis was initiated by the bankruptcy of the world's fourth largest investment bank, Lehman Brothers, a bank with over 100 years of history, a bank with local headquarters in many countries and operating globally. This bankruptcy has become one of the best known exceptions to the rule that a big one cannot fall. Many other financial institutions had serious financial problems, and could also declare bankruptcy if the state as part of public aid, as part of large-scale state interventionism, did not help the banking sector. However, at least several other investment banks accurately predicted this financial crisis and won in business on this. Just before the outbreak of the financial crisis, which occurred in mid-September 2008, several other investment banks entered into transactions that made them earn from falling prices of market valuations of shares and other securities listed on stock exchanges. These undermining the ethics of current business practice have been proven by several of these banks. Some of these banks have paid fines for these unethical practices, thus admitting that they have contributed to the scale of the financial crisis and its prognosis and keeping this information secret from many other financial market participants. The paradox of the processes of predicting future phenomena is that the more specific processes, phenomena, events etc. are predictable, repetitive, quantitatively measurable, etc., it turns out later that these factors generate the most errors of the prognostic process. Similarly, if more financial market participants have specific, similar, standardized, widespread quantitative forecasting tools, then either important events occur on the basis of self-fulfilling prophecy and strongly, hyperbolically accelerating speculation or another financial crisis occurs at a completely different moment, a completely different nature , caused by previously unknown or unseen source factors than most forecasting centers, have been predicted by certain events. I have been conducting research in this field for many years, including central banking errors and determinants of improving credit risk management processes in banks. I described these issues in my scientific publications, which are available on the Research Gate portal.
I invite you to discussion and scientific cooperation.
Thank you very much.
Best wishes.
Dariusz Prokopowicz
FINANCIAL CRISIS is something we analyze, not forecast. All crisis had been analyzed, not one could be predicted. COVID-19 was thought of as a common cold, now it is a pandemic; as the result, we are in the middle of the crisis now. Where was our forecast?
Financial crisis, economic crisis, etc. ----no one can predict. We talk about it after the fact and speculate that it will occur in the future; however, when crisis occurs in the future, it is not of the same type. All crisis studies are considered failed research because it has no application. How many times did we have world economic crisis? with each time, we thought we could predict its coming in the future; with each prediction we made, we saw our own short coming when our forecast failed. To some extent, the ups and downs of the financial markets may be predicted, but large negative shock that will ripple through the financial markets into crisis is elusive. Like earthquake and lightning, how precise are our predictions?
I thought that the best prediction of crises is by investors' behavioral indexes, where most of crises start and surge by psychological reasons. When the crowd tends to take the irrational decisions, that give a sign to crises start. It is batter to review the behavioral finance biases.
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