Predicting Financial Crises: The (Statistical) Significance of the Signals Approach

Makram El-Shagi, Tobias Knedlik and Gregor von Schweinitz

No 3/2012, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: The signals approach as an early warning system has been fairly successful in detecting crises, but it has so far failed to gain popularity in the scientific community because it does not distinguish between randomly achieved in-sample fit and true predictive power. To overcome this obstacle, we test the null hypothesis of no correlation between indicators and crisis probability in three applications of the signals approach to different crisis types. To that end, we propose bootstraps specifically tailored to the characteristics of the respective datasets. We find (1) that previous applications of the signals approach yield economically meaningful and statistically significant results and (2) that composite indicators aggregating information contained in individual indicators add value to the signals approach, even where most individual indicators are not statistically significant on their own.

Keywords: early warning system; signals approach; bootstrap; Frühwarnsysteme; Signalansatz; Bootstrap-Methoden (search for similar items in EconPapers)
JEL-codes: C15 E60 F01 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Predicting financial crises: The (statistical) significance of the signals approach (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-3-12

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