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Predicting Sovereign Debt Crises Using Artificial Neural Networks: A Comparative Approach

  • Marco Fioramanti

    (ISAE - Institute for Studies and Economic Analyses
    University of Pescara, Faculty of Economics)

Recent episodes of financial crises have revived the interest in developing models that are able to timely signal their occurrence. The literature has developed both parametric and non parametric models to predict these crises, the so called Early Warning Systems. Using data related to sovereign debt crises occurred in developing countries from 1980 to 2004, this paper shows that a further progress can be done applying a less developed non-parametric method, i.e. Artificial Neural Networks (ANN). Thanks to the high flexibility of neural networks and to the Universal Approximation Theorem an ANN based early warning system can, under certain conditions, outperform more consolidated methods.

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Paper provided by ISTAT - Italian National Institute of Statistics - (Rome, ITALY) in its series ISAE Working Papers with number 72.

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Length: 32 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:isa:wpaper:72
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  1. André Fourçans & Raphaël Franck, 2003. "Currency Crises," Books, Edward Elgar, number 3124, April.
  2. Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998. "Leading Indicators of Currency Crises," MPRA Paper 6981, University Library of Munich, Germany.
  3. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 03/221, International Monetary Fund.
  4. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
  5. Ciarlone, Alessio & Trebeschi, Giorgio, 2005. "Designing an early warning system for debt crises," Emerging Markets Review, Elsevier, vol. 6(4), pages 376-395, December.
  6. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 225-38, January.
  7. Graciela L. Kaminsky, 2003. "Varieties of Currency Crises," NBER Working Papers 10193, National Bureau of Economic Research, Inc.
  8. Abdul Abiad, 2003. "Early Warning Systems: A Survey and a Regime-Switching Approach," IMF Working Papers 03/32, International Monetary Fund.
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