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Predicting financial crises: The (statistical) significance of the signals approach

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  • El-Shagi, M.
  • Knedlik, T.
  • von Schweinitz, G.

Abstract

The signals approach as an early-warning system has been fairly successful in detecting crises, but it has so far failed to gain popularity in the scientific community because it cannot distinguish between randomly achieved in-sample fit and true predictive power. To overcome this obstacle, we test the null hypothesis of no correlation between indicators and crisis probability in three applications of the signals approach to different crisis types. To that end, we propose bootstraps specifically tailored to the characteristics of the respective datasets. We find (1) that previous applications of the signals approach yield economically meaningful results; (2) that composite indicators aggregating information contained in individual indicators add value to the signals approach; and (3) that indicators which are found to be significant in-sample usually perform similarly well out-of-sample.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 35 (2013)
Issue (Month): C ()
Pages: 76-103

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Handle: RePEc:eee:jimfin:v:35:y:2013:i:c:p:76-103

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Early warning system; Signals approach; Bootstrap;

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References

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Citations

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Cited by:
  1. Knedlik, Tobias, 2013. "The European Commission's Scoreboard of Macroeconomic Imbalances: The impact of preferences on an early warning system," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80028, Verein für Socialpolitik / German Economic Association.
  2. El-Shagi, Makram & Kelly, Logan, 2013. "Liquidity in the Liquidity Crisis: Evidence from Divisia Monetary Aggregates in Germany and the European Crisis Countries," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79935, Verein für Socialpolitik / German Economic Association.
  3. Tobias Knedlik & Gregor Von Schweinitz, 2012. "Macroeconomic Imbalances as Indicators for Debt Crises in Europe," Journal of Common Market Studies, Wiley Blackwell, vol. 50(5), pages 726-745, 09.
  4. Sarlin, Peter, 2013. "On policymakers’ loss functions and the evaluation of early warning systems," Economics Letters, Elsevier, vol. 119(1), pages 1-7.
  5. Makram El-Shagi & Gregor von Schweinitz, 2012. "Qual VAR Revisited: Good Forecast, Bad Story," IWH Discussion Papers 12, Halle Institute for Economic Research.
  6. Makram El-Shagi & Axel Lindner & Gregor von Schweinitz, 2014. "Real Effective Exchange Rate Misalignment in the Euro Area: A Counterfactual Analysis," IWH Discussion Papers 6, Halle Institute for Economic Research.

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