Forecasting Assset Price Booms Up to Two Years in Advance

From Better Advances Press, Review of Economics & Finance:

Early Warning Indicators for Asset Price Booms

Prof. Dr. Dieter Gerdesmeier
European Central Bank

Prof. Dr. Hans-Eggert Reimers (Correspondence Author)
Hochschule Wismar

Dr. Barbara Roffia
European Central Bank

Abstract: The recent financial crisis has demonstrated in an impressive way that boom/bust cycles can have devastating effects on the real economy. This paper aims at contributing to the literature on early warning indicator exercises for asset price booms. Using a sample of 17 industrialized OECD countries and the euro area over the period 1969 Q1 – 2010 Q2, an asset price composite indicator incorporating developments in both stock and house price markets is constructed. The latter is then further developed in order to identify periods that can be characterized as asset price booms. The subsequent empirical analysis is based on a probit-type approach incorporating several monetary, financial and real variables. Following some statistical tests, credit aggregates, the investment-to-GDP ratio, the interest rate spread together with the house price growth gap and stock price developments appear to be useful indicators for the prediction of asset price booms up to two years ahead.

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