Evaluating the Effectiveness of Early Warning Indicators: An Application of Receiver Operating Characteristic Curve Approach to Panel Data

Yusuf Yildirim and Anirban Sanyal

MPRA Paper from University Library of Munich, Germany

Abstract: Early warning indicators (EWIs) of banking crises should ideally be judged on how well they function in relation to the choice issue faced by macroprudential policymakers. Several practical features of this challenge are translated into statistical evaluation criteria, including difficulties measuring the costs and advantages of various policy interventions, as well as requirements for the timeliness and stability of EWIs. We analyze the balance panel of possible EWIs for six countries that have experienced currency crisis and banking crisis in recent times. Using possible early warning indicators, we evaluate the suitability of these EWIs in view of their predictive power and stability of signals. The paper observes that credit disbursements to non-financial sectors and central government provides stable signal about systemic risks. Further debt service ratio, inter bank rates and total reserves are also found to be useful in predicting these crisis. Lastly, the paper observes that linear combination of these indicators improves the predictive power of EWIs further.

Keywords: EWIs; ROC; area under the curve; shrinkage (search for similar items in EconPapers)
JEL-codes: C40 G01 G21 (search for similar items in EconPapers)
Date: 2022-02-23
New Economics Papers: this item is included in nep-ban and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/112079/1/MPRA_paper_112079.pdf original version (application/pdf)

Related works:
Journal Article: Evaluating the Effectiveness of Early Warning Indicators: An Application of Receiver Operating Characteristic Curve Approach to Panel Data (2022)
Working Paper: Evaluating the Effectiveness of Early Warning Indicators: An Application of Receiver Operating Characteristic Curve Approach to Panel Data (2022)
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:pra:mprapa:112079

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().