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How to evaluate an Early Warning System? Towards a United Statistical Framework for Assessing Financial Crises Forecasting Methods

  • Candelon Bertrand
  • Dumitrescu Elena-Ivona
  • Hurlin Christophe

    (METEOR)

This paper proposes a new statistical framework originating from the traditional credit-scoring literature, to evaluate currency crises Early Warning Systems (EWS). Based on an assessment of the predictive power of panel logit and Markov frameworks, the panel logit model is outperforming the Markov switching specitcations. Furthermore, the introduction of forward-looking variables clearly improves the forecasting properties of the EWS. This improvement confirms the adequacy of the second generation crisis models in explaining the occurrence of crises.

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Paper provided by Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) in its series Research Memorandum with number 046.

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Date of creation: 2010
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Handle: RePEc:unm:umamet:2010046
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  1. 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.
  2. Kumar, Mohan & Moorthy, Uma & Perraudin, William, 2003. "Predicting emerging market currency crashes," Journal of Empirical Finance, Elsevier, vol. 10(4), pages 427-454, September.
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  7. Don Harding & Adrian Pagan, 2006. "The Econometric Analysis of Constructed Binary Time Series," Department of Economics - Working Papers Series 963, The University of Melbourne.
  8. Arturo Estrella & Frederic S. Mishkin, 1996. "The yield curve as a predictor of U.S. recessions," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Jun).
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  10. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  11. Fratzscher, Marcel, 2002. "On currency crises and contagion," Working Paper Series 0139, European Central Bank.
  12. Clark, Todd E. & West, Kenneth D., 2007. "Approximately normal tests for equal predictive accuracy in nested models," Journal of Econometrics, Elsevier, vol. 138(1), pages 291-311, May.
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  14. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
  15. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
  16. Abdul Abiad, 2003. "Early Warning Systems: A Survey and a Regime-Switching Approach," IMF Working Papers 03/32, International Monetary Fund.
  17. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
  18. Fuertes, Ana-Maria & Kalotychou, Elena, 2007. "Optimal design of early warning systems for sovereign debt crises," International Journal of Forecasting, Elsevier, vol. 23(1), pages 85-100.
  19. Arturo Estrella & Mary R. Trubin, 2006. "The yield curve as a leading indicator: some practical issues," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 12(Jul).
  20. van den Berg, Jeroen & Candelon, Bertrand & Urbain, Jean-Pierre, 2008. "A cautious note on the use of panel models to predict financial crises," Economics Letters, Elsevier, vol. 101(1), pages 80-83, October.
  21. George Kapetanios, 2003. "Determining the Poolability of Individual Series in Panel Datasets," Working Papers 499, Queen Mary University of London, School of Economics and Finance.
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