Paradigm Reconstruction of Early-Warning System of Financial Crisis

Page 1

Frontiers in Finance Volume 1, 2015 doi: 10.14355/ff.2015.01.008

www.seipub.org/ff

Paradigm Reconstruction of Early-Warning System of Financial Crisis Yin Yu Economics & Management School, Shanghai Second Polytechnic University, Shanghai, China yuyin@sspu.edu.cn Abstract By analyzing the shortcoming of existing research paradigm of the early warning system of financial crisis, the conceptual framework of "pressure-state-impact-response" (PSIR) was introduced. A research paradigm of early warning system of financial crisis was created with the cyclical characteristics. And the CGE model was used to analyze the preparation of the early warning indicators and prediction for financial crisis. Keywords Financial Crisis; Early-warning System; PSIR Framework

Introduction Numerous scholars have studied early-warning system of financial crisis with hundreds of systems being established over the past three decades. However, early-warning system has been criticized in various aspects due to constant outbreaks of financial crisis. For example, the selection of indicators and threshold values for crisis depends on samples, which may be too casual; “Lucas critique” cannot be avoided; it is difficult to compare advantages and disadvantages among different systems and the results of assessment are indeed unsatisfactory (e.g. Beckmann et al., 2006; Duca and Peltonen, 2012). Facing questions and unsatisfactory assessment results, researchers began diagnosing various parts of earlywarning system and carried out constructive research. Previous researches aimed at improving the accuracy rate of early-warning system. Two neglected obvious conditions should be paid attention to. First, some crises are early warned without sufficient importance being attached to by authorities concerned. Second, some crises are warned with sufficient importance by authorities and with crucial policy intervention, however, the economic running system is still on sliding into crisis inertially. The reason is that the design purpose of an early-warning system is to offer warnings for possible crises to the policy makers and the market participators. These researches are based on an one-way research paradigm. This paradigm itself is one of the major reasons for a series of problems. Improving research paradigm may be a reasonable choice and an attempt to resolve these problems. Therefore, the view angle of forecasting accuracy should be jumped out of. The design purpose of early-warning system is identified for problems instead of crises. Depending on this orientation, a research paradigm based on a circular concept framework of “pressure-state-impact-response” is established in this paper. Defects of Existing Paradigm People followed this paradigm consciously related to research on early-warning system: define a crisis as per the scope of system, prepare the indicator (maybe a single indicator, a single composite indicator or an indicators set), select forecast models and put forward policy proposals based on forecast results. The research paradigm is named as “one-way paradigm”. Two large feedback courses exist in the early-warning systems built on the basis of this structure. First, based on a selected model, selected indicators and data, including time windows and sample status, are adjusted to adapt to

65


Turn static files into dynamic content formats.

Create a flipbook
Issuu converts static files into: digital portfolios, online yearbooks, online catalogs, digital photo albums and more. Sign up and create your flipbook.