A framework for early-warning modeling with an application to banks
Jan Hannes Lang,
Tuomas A. Peltonen and
Peter Sarlin
No 2182, Working Paper Series from European Central Bank
Abstract:
This paper proposes a framework for deriving early-warning models with optimal out-of-sample forecasting properties and applies it to predicting distress in European banks. The main contributions of the paper are threefold. First, the paper introduces a conceptual framework to guide the process of building early-warning models, which highlights and structures the numerous complex choices that the modeler needs to make. Second, the paper proposes a flexible modeling solution to the conceptual framework that supports model selection in real-time. Specifically, our proposed solution is to combine the loss function approach to evaluate early-warning models with regularized logistic regression and cross-validation to find a model specification with optimal real-time out-of-sample forecasting properties. Third, the paper illustrates how the modeling framework can be used in analysis supporting both microand macro-prudential policy by applying it to a large dataset of EU banks and showing some examples of early-warning model visualizations. JEL Classification: G01, G17, G21, G33, C52, C54
Keywords: bank distress; early-warning models; financial crises; micro- and macro-prudential analysis; regularization (search for similar items in EconPapers)
Date: 2018-10
New Economics Papers: this item is included in nep-ecm, nep-for and nep-rmg
Note: 2731285
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)
Downloads: (external link)
https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2182.en.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20182182
Access Statistics for this paper
More papers in Working Paper Series from European Central Bank 60640 Frankfurt am Main, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Official Publications ().