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Comparing different early warning systems: Results from a horse race competition among members of the Macro-prudential Research Network

Listed author(s):
  • Alessi, Lucia
  • Antunes, Antonio
  • Babecky, Jan
  • Baltussen, Simon
  • Behn, Markus
  • Bonfim, Diana
  • Bush, Oliver
  • Detken, Carsten
  • Frost, Jon
  • Guimaraes, Rodrigo
  • Havranek, Tomas
  • Joy, Mark
  • Kauko, Karlo
  • Mateju, Jakub
  • Monteiro, Nuno
  • Neudorfer, Benjamin
  • Peltonen, Tuomas
  • Rodrigues, Paulo
  • Rusnak, Marek
  • Schudel, Willem
  • Sigmund, Michael
  • Stremmel, Hanno
  • Smidkova, Katerina
  • van Tilburg, Ruben
  • Vasicek, Borek
  • Zigraiova, Diana

Over the recent decades researchers in academia and central banks have developed early warning systems (EWS) designed to warn policy makers of potential future economic and financial crises. These EWS are based on diverse approaches and empirical models. In this paper we compare the performance of nine distinct models for predicting banking crises resulting from the work of the Macroprudential Research Network (MaRs) initiated by the European System of Central Banks. In order to ensure comparability, all models use the same database of crises created by MaRs and comparable sets of potential early warning indicators. We evaluate the models’ relative usefulness by comparing the ratios of false alarms and missed crises and discuss implications for pratical use and future research. We find that multivariate models, in their many appearances, have great potential added value over simple signalling models. One of the main policy recommendations coming from this exercise is that policy makers can benefit from taking a broad methodological approach when they develop models to set macro-prudential instruments.

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File URL: https://mpra.ub.uni-muenchen.de/62194/1/MPRA_paper_62194.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 62194.

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Date of creation: 16 Feb 2015
Handle: RePEc:pra:mprapa:62194
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  2. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
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  7. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," Center for International and Development Economics Research (CIDER) Working Papers 233424, University of California-Berkeley, Department of Economics.
  8. Babecký, Jan & Havránek, Tomáš & Matějů, Jakub & Rusnák, Marek & Šmídková, Kateřina & Vašíček, Bořek, 2014. "Banking, debt, and currency crises in developed countries: Stylized facts and early warning indicators," Journal of Financial Stability, Elsevier, vol. 15(C), pages 1-17.
  9. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
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  11. Asli Demirgüç-Kunt & Enrica Detragiache, 2005. "Cross-Country Empirical Studies of Systemic Bank Distress: A Survey," National Institute Economic Review, National Institute of Economic and Social Research, vol. 192(1), pages 68-83, April.
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  13. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Using Market Information for Banking System Risk Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
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