Given the unobserved nature of expectations, this paper employs latent variable analysis to examine three financial instability models and assess their out-of-sample forecasting accuracy. We compare a benchmark linear random walk model, which implies exogenous instability phenomena, with a...

Given the unobserved nature of expectations, this paper employs latent variable analysis to examine three financial instability models and assess their out-of-sample forecasting accuracy. We compare a benchmark linear random walk model, which implies exogenous instability phenomena, with a...

Financial Crises can be shown to be related to the pro-cyclical nature of finance. In fact, the bigger financial crises are almost always preceded by a credit market or an asset market boom. And the recurrence of crises time and again suggests that financial regulation as it exists today has...