An Analytic Network Process model for financial-crisis forecasting

Michael Niemira
Economic Research Department
Bank of Tokyo-Mitsubishi
United States
Thomas Saaty
Joseph M. Katz Graduate School of Business
University of Pittsburgh
United States

Publication date: Oct, 2004

Journal: International Journal of Forecasting
Vol.: 20- Issue: 4- Pages: 573-587

Abstract: We discuss and develop an imbalance-crisis turning point model to forecast the likelihood of a financial crisis based on an Analytic Network Process framework. The Analytic Network Process (ANP) is a general theory of relative measurement used to derive composite-priority-ratio scales from individual-ratio scales that represent relative influence of factors that interact with respect to control criteria. Through its supermatrix, which is composed of matrices of column priorities, the ANP framework captures the outcome of dependence and feedback within and between clusters of explanatory factors. We argue that our framework is more flexible and is more comprehensive than traditional methods and previous models. We illustrate how the ANP model would be implemented for forecasting the probability of crises.

Keywords: Financial crises, Modeling, Analytic Network Process, ANP