Predicting financial crises : myth and reality

Abstract EN

Forecasting financial crises has always been one of the most controversial topics in modern finance, especially in recent years.

The aim of this article is not to build a new model able to anticipate or provide some early warning signals for those crises, but to overview the existing body of literature in an attempt to show the predictive power of EWSs used.

After a comparison betweenfinancial crises and financial stability, we proceed to detailed analysis of different financial crises, their indicators, triggers, and implications.

We concludewith an assessment of the effectiveness of the EWSs utilized by different bodies and institutions in predicting financial turbulences.

The final result is that financial crises are unpredictable and always take market participants and policymakers by surprise.

These people ask continually themselves “why didn’t they think of thisearlier?” These are the limits of financial engineering(securitization) in a world under financial globalization.