Towards a new early warning system of financial crises

Arbeitspapier

This paper develops a new Early Warning System (EWS) model for predicting financial crises, based on a multinomial logit model. It is shown that EWS approaches based on binomial discrete-dependent-variable models can be subject to what we call a post-crisis bias. This bias arises when no distinction is made between tranquil periods, when economic fundamentals are largely sound and sustainable, and crisis/post-crisis periods, when economic variables go through an adjustment process before reaching a more sustainable level or growth path. We show that applying a multinomial logit model, which allows distinguishing between more than two states, is a valid way of solving this problem and constitutes a substantial improvement in the ability to forecast financial crises. The empirical results reveal that, for a set of 32 open emerging markets from 1993 till the present, the model would have correctly predicted a large majority of crises in emerging markets. Moreover, we derive general results about the optimal design of EWS models, which allows policy-makers to make an optimal choice based on their degree of risk-aversion against unanticipated financial crises.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: ECB Working Paper ; No. 145

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Foreign Exchange ; Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation: Models and Applications ; International Finance: General
• Thema: crisis prediction ; currency crises ; Early Warning System

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Bussière, Matthieu ; Fratzscher, Marcel
• Ereignis: Veröffentlichung
• (wer): European Central Bank (ECB)
• (wo): Frankfurt a. M.
• (wann): 2002

Weitere Informationen

• Handle: http://hdl.handle.net/10419/152579
• Letzte Aktualisierung: 10.03.2025, 11:43 MEZ