Financial crises and the extreme bounds of predictors

Abstract

The study examines the determinants of financial crises. The paper applies extreme bounds analysis on a panel of countries to test the robustness of 43 variables in capturing varying financial crises. At a stricter bound and keeping the growth rate of real gross domestic product per capita constant, regulation emerges as the most indispensable factor for the control of episodes of financial crises. Characterizing the potential dynamic relationship among the variables of interest, growth in real gross domestic product per capita, regulation, remittance, global stock volatility, institutional quality, and export and import of goods and services robustly relate with financial crises. While these variables are important, in recent times and under a coefficient normality assumption, more variables emerge as robust determinants of financial crises. An examination of each type of crisis reveals that inflation is an indispensable factor in the occurrence of any type of crisis.