An early warning system for financial crisis using a stock market instability index

Dong Ha Kim, Suk Jun Lee, Kyong Joo Oh, Tae Yoon Kim

Research output: Contribution to journalArticle

13 Citations (Scopus)

Abstract

This paper proposes to utilize a stock market instability index (SMII) to develop an early warning system for financial crisis. The system focuses on measuring the differences between the current market conditions and the conditions of the past when the market was stable. Technically the system evaluates the current time series against the past stable time series modelled by an asymptotic stationary autoregressive model via artificial neural networks. Advantageously accessible to extensive resources, the system turns out better results than the conventional system which detects similarities between the conditions of the current market and the conditions of previous markets that were in crisis. Therefore, it should be considered as a more advanced tool to prevent financial crises than the conventional one. As an empirical example, an SMII for the Korean stock market is developed in order to demonstrate its potential usefulness as an early warning system.

Original languageEnglish
Pages (from-to)260-273
Number of pages14
JournalExpert Systems
Volume26
Issue number3
DOIs
Publication statusPublished - 2009 Jul 1

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All Science Journal Classification (ASJC) codes

  • Control and Systems Engineering
  • Theoretical Computer Science
  • Computational Theory and Mathematics
  • Artificial Intelligence

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