A study on the market instability index and risk warning levels in early warning system for economic crisis |
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| Affiliation: | 1. Department of Physics, Cochin University of Science and Technology, Cochin 682022, India;2. Materials Science and Technology Division, National Institute for Interdisciplinary Science and Technology, Thiruvananthapuram 695019, India;1. State Key Lab of Mechanical System and Vibration, School of Mechanical Engineering, Shanghai Jiao Tong University, Shanghai 200240, China;2. Department of Systems Engineering & Engineering Management, City University of Hong Kong, Hong Kong, China;3. State Key Laboratory of High Performance Complex Manufacturing, Central South University, Changsha, Hunan, China;4. Department of Automation, Shanghai Jiao Tong University, Shanghai 200240, China;1. Departamento de Física Aplicada I, Escuela Superior de Ingeniería, Universidad del País Vasco UPV/EHU, Alda. Urquijo s/n, 48013 Bilbao, Spain;2. Department of Excited States Spectroscopy, Institute of Low Temperature and Structure Research, Polish Academy of Sciences, 50-422 Wroclaw, Poland;3. Materials Physics Center CSIC-UPV/EHU, 20018 San Sebastián, Spain;1. ORPE “Technologiya” Named after A.G. Romashin, Obninsk, Russia;2. Moscow Aviation Institute (National Research University), Moscow, Russia;3. Bauman Moscow State Technical University, Moscow, Russia |
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| Abstract: | Early warning system (EWS) can be treated as a pattern recognition problem since the distinctive feature of economic crisis makes it possible to distinguish critical and normal economic situations using a pattern classifier. Although the most works in EWS are mainly focused on training and pattern classifier, little attention has been paid to the effective indices or feature variables that allow closer look and analysis about the current instability nature of the economic crisis. This paper proposes to utilize market instability index (MII) and stepwise risk warning levels that can diagnose the current instability of the stock market to foretell how the current stock market will proceed in advance. This approach allows the proper policy actions to be taken for the possible financial crisis according to different risk warning levels of instability. Through empirical examples with Korean stock market and Greece stock market, the proposed method demonstrates its potential usefulness in an early warning system. |
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| Keywords: | Early warning system (EWS) Market instability index (MII) Economic crisis Crisis prediction |
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