School of Economics and Finance

No. 538: Forecasting Financial Crises and Contagion in Asia Using Dynamic Factor Analysis

Andrea Cipollini , Queen Mary, University of London
George Kapetanios , Queen Mary, University of London

May 1, 2005

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In this paper we compare the performance of a regional indicator of vulnerability in predicting, out of sample, the crisis events affecting the South East Asian region during the 1997-98 period. A Dynamic Factor method was used to retrieve the vulnerability indicator and stochastic simulation is used to produce probability forecasts. The empirical findings suggest evidence of financial contagion.

J.E.L classification codes: C32, C51, F34

Keywords:Financial contagion, Dynamic factor model