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Penalized Maximum Likelihood Estimation Of Logit-Based Early Warning Systems

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  • Claudia Pigini

    (Dipartimento di Scienze Economiche e Sociali - Universita' Politecnica delle Marche)

Abstract

Panel logit models have proved to be simple and effective tools to build Early Warning Systems (EWS) for financial crises. But because crises are rare events, the estimation of EWS does not usually account for country fixed effects, so as to avoid losing all the information relative to countries that never face a crisis. I propose using a penalized maximum likelihood estimator for fixed-effects logit-based EWS where all the observations are retained. I show that including country effects, while preserving the entire sample, greatly improves the predictive power of EWS with respect to the pooled, random-effects and standard fixed-effects models.

Suggested Citation

  • Claudia Pigini, 2019. "Penalized Maximum Likelihood Estimation Of Logit-Based Early Warning Systems," Working Papers 441, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    • Handle: RePEc:anc:wpaper:441
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    Cited by:

    1. Kajal Lahiri & Cheng Yang, 2023. "ROC and PRC Approaches to Evaluate Recession Forecasts," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 19(2), pages 119-148, September.
    2. Bartolucci, Francesco & Pigini, Claudia & Valentini, Francesco, 2021. "MCMC Conditional Maximum Likelihood for the two-way fixed-effects logit," MPRA Paper 110034, University Library of Munich, Germany.

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    More about this item

    Keywords

    Keywords: Banking Crisis; Bias Reduction; Fixed-Effects Logit; Separated Data;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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