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Measuring financial cycle time

Author

Listed:
  • Andrew Filardo
  • Marco Jacopo Lombardi
  • Marek Raczko
Abstract
Motivated by the traditional business cycle approach of Burns and Mitchell (1946), we explore cyclical similarities in financial conditions over time in order to improve our understanding of financial cycles. Looking back at 120 years of data, we find that financial cycles exhibit behaviour characterised by recurrent, endogenous swings in financial conditions, which result in costly booms and busts. Yet the recurrent nature of such swings may not appear so obvious when looking at conventionally plotted time-series data (that is, observed in calendar time). Using the pioneering framework developed by Stock (1987), we offer a new statistical characterisation of the financial cycle using a continuous-time autoregressive model subject to time deformation, and test for systematic differences between calendar and a new notion of financial cycle time. We find the time deformation to be statistically significant, and associated with levels of long-term real interest rates, inflation volatility and the perceived riskiness of the macro-financial environment. Implications for statistical modelling, endogenous risk-taking economic behaviour and policy are highlighted.

Suggested Citation

  • Andrew Filardo & Marco Jacopo Lombardi & Marek Raczko, 2018. "Measuring financial cycle time," BIS Working Papers 755, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:755
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    Cited by:

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    2. Potjagailo, Galina & Wolters, Maik H., 2023. "Global financial cycles since 1880," Journal of International Money and Finance, Elsevier, vol. 131(C).
    3. Hodula, Martin & Janků, Jan & Pfeifer, Lukáš, 2023. "Macro-prudential policies to contain the effect of structural risks on financial downturns," Journal of Policy Modeling, Elsevier, vol. 45(6), pages 1204-1222.
    4. Hodula, Martin & Škrabić Perić, Blanka & Sorić, Petar, 2023. "Economic uncertainty and non-bank financial intermediation: Evidence from a European panel," Finance Research Letters, Elsevier, vol. 53(C).
    5. Guglielmo Maria Caporale & Luis A. Gil-Alana & Carlos Poza, 2021. "Cycles and Long-Range Behaviour in the European Stock Markets," Dynamic Modeling and Econometrics in Economics and Finance, in: Gilles Dufrénot & Takashi Matsuki (ed.), Recent Econometric Techniques for Macroeconomic and Financial Data, pages 293-302, Springer.
    6. Claudio Borio & Mathias Drehmann & Dora Xia, 2018. "The financial cycle and recession risk," BIS Quarterly Review, Bank for International Settlements, December.
    7. Hodula, Martin & Libich, Jan, 2023. "Has monetary policy fueled the rise in shadow banking?," Economic Modelling, Elsevier, vol. 123(C).
    8. Jan Libich & Liam Lenten, 2022. "Hero or villain? The financial system in the 21st century," Journal of Economic Surveys, Wiley Blackwell, vol. 36(1), pages 3-40, February.
    9. Andrew Filardo & Paul Hubert & Phurichai Rungcharoenkitkul, 2019. "The reaction function channel of monetary policy and the financial cycle," SciencePo Working papers Main hal-03403260, HAL.
    10. Martin Hodula & Jan Janku & Lukas Pfeifer, 2021. "Interaction of Cyclical and Structural Systemic Risks: Insights from Around and After the Global Financial Crisis," Research and Policy Notes 2021/03, Czech National Bank.
    11. Tölö, Eero, 2019. "Predicting systemic financial crises with recurrent neural networks," Research Discussion Papers 14/2019, Bank of Finland.
    12. Shigenori Shiratsuka, 2021. "Monetary Policy Effectiveness under the Ultra-Low Interest Rate Environment: Evidence from Yield Curve Dynamics in Japan," Keio-IES Discussion Paper Series 2021-012, Institute for Economics Studies, Keio University.
    13. Tölö, Eero, 2020. "Predicting systemic financial crises with recurrent neural networks," Journal of Financial Stability, Elsevier, vol. 49(C).
    14. repec:zbw:bofrdp:2019_014 is not listed on IDEAS

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    More about this item

    Keywords

    financial cycles; continuous-time autoregressive models; time deformation; behavioural economics; endogenous risk-taking behaviour; central banking;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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