`psymonitor`

provides an accessible implementation of the popular real-time monitoring strategy proposed by Phillips, Shi and Yu (2015a,b;PSY), along with a new bootstrap procedure designed to mitigate the potential impact of heteroskedasticity and to effect family-wise size control in recursive testing algorithms (Phillips and Shi, forthcoming). This methodology has been shown effective for bubble and crisis detection (PSY, 2015a,b; Phillips and Shi, 2017) and is now widely used by academic researchers, central bank economists, and fiscal regulators.

You can install the **stable** version from CRAN

`install.packages("psymonitor")`

You can install the **development** version from GitHub

```
# install.packages("devtools")
devtools::install_github("itamarcaspi/psymonitor")
```

For the illustration purposes we will use data on the credit risk in the European sovereign sector, that is proxied by an index constructed as a GDP weighted 10-year government bond yield of the GIIPS (Greece, Ireland, Italy, Portugal, and Spain) countries, and comes with the ‘psymonitor’ package.

Let’s walk through some basics. First load the `psymonitor`

package and get data on GIIPS spread.

Next, define a few parameters for the test and the simulation.

```
y <- spread$value
obs <- length(y)
swindow0 <- floor(obs * (0.01 + 1.8 / sqrt(obs))) # set minimal window size
IC <- 2 # use BIC to select the number of lags
adflag <- 6 # set the maximum nuber of lags to 6
yr <- 2
Tb <- 12*yr + swindow0 - 1 # Set the control sample size
nboot <- 99 # set the number of replications for the bootstrap
```

Next, estimate the PSY test statistic using `PSY()`

and its corresponding bootstrap-based critical values using `cvPSYwmboot()`

.

```
bsadf <- PSY(y, swindow0 = swindow0, IC = IC,
adflag = adflag) # estimate the PSY test statistics sequence
quantilesBsadf <- cvPSYwmboot(y, swindow0 = swindow0, IC = IC,
adflag = adflag, Tb = Tb, nboot = 99,
nCores = 2) # simulate critical values via wild bootstrap. Note that the number of cores is arbitrarily set to 2.
```

Next, identify crisis periods, defined as periods where the test statistic is above its corresponding critical value, using the `locate()`

function.

```
dim <- obs - swindow0 + 1
monitorDates <- spread$date[swindow0:obs]
quantile95 <- quantilesBsadf %*% matrix(1, nrow = 1, ncol = dim)
ind95 <- (bsadf > t(quantile95[2, ])) * 1
periods <- locate(ind95, monitorDates) # Locate crisis periods
```

Finally, print a table that holds the identified crisis periods with the help of the `disp()`

function.

```
crisisDates <- disp(periods, obs) #generate table that holds crisis periods
print(crisisDates)
```

start | end | |
---|---|---|

1 | 2008-03-01 | 2008-03-01 |

2 | 2008-09-01 | 2009-04-01 |

3 | 2010-05-01 | 2012-08-01 |

Pleas check the packages’ articles for an elaborated analysis of the spreads data, as well as a demonstration using data on the S&P 500 price-to-dividend ratio.

- Phillips, P. C. B., & Shi, S.(2017). Detecting financial collapse and ballooning sovereign risk. Cowles Foundation Discussion Paper No. 2110.
- Phillips, P. C. B., & Shi, S.(forthcoming). Real time monitoring of asset markets: Bubbles and crisis. In Hrishikesh D. Vinod and C.R. Rao (Eds.),
*Handbook of Statistics Volume 41 - Econometrics Using R*. - Phillips, P. C. B., Shi, S., & Yu, J. (2015a). Testing for multiple bubbles: Historical episodes of exuberance and collapse in the S&P 500.
*International Economic Review*, 56(4), 1034–1078. - Phillips, P. C. B., Shi, S., & Yu, J. (2015b). Testing for multiple bubbles: Limit Theory for Real-Time Detectors.
*International Economic Review*, 56(4), 1079–1134.