Arbeitspapier
Optimizing policymakers' loss functions in crisis prediction: Before, within or after?
Early-warning models most commonly optimize signaling thresholds on crisis probabilities. The expost threshold optimization is based upon a loss function accounting for preferences between forecast errors, but comes with two crucial drawbacks: unstable thresholds in recursive estimations and an in-sample overfit at the expense of out-of-sample performance. We propose two alternatives for threshold setting: (i) including preferences in the estimation itself and (ii) setting thresholds ex-ante according to preferences only. Given probabilistic model output, it is intuitive that a decision rule is independent of the data or model specification, as thresholds on probabilities represent a willingness to issue a false alarm vis-à-vis missing a crisis. We provide simulated and real-world evidence that this simplification results in stable thresholds and improves out-of-sample performance. Our solution is not restricted to binary-choice models, but directly transferable to the signaling approach and all probabilistic early-warning models.
- ISBN
-
978-92-899-2747-5
- Sprache
-
Englisch
- Erschienen in
-
Series: ECB Working Paper ; No. 2025
- Klassifikation
-
Wirtschaft
Multiple or Simultaneous Equation Models: Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
Forecasting Models; Simulation Methods
Financial Crises
- Thema
-
Early-warning models
Loss functions
Threshold setting
Predictive performance
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Sarlin, Peter
von Schweinitz, Gregor
- Ereignis
-
Veröffentlichung
- (wer)
-
European Central Bank (ECB)
- (wo)
-
Frankfurt a. M.
- (wann)
-
2017
- DOI
-
doi:10.2866/48672
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:44 MEZ
Datenpartner
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.
Objekttyp
- Arbeitspapier
Beteiligte
- Sarlin, Peter
- von Schweinitz, Gregor
- European Central Bank (ECB)
Entstanden
- 2017
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