Towards A New Early Warning System of Financial Crises
Marcel Fratzscher () and
Matthieu Bussiere ()
No 81, Royal Economic Society Annual Conference 2003 from Royal Economic Society
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.
Keywords: currency crises; Early Warning System; crisis prediction (search for similar items in EconPapers)
JEL-codes: F31 F47 F30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm, nep-fin and nep-ifn
References: Add references at CitEc
Citations: View citations in EconPapers (41) Track citations by RSS feed
Downloads: (external link)
http://repec.org/res2003/Fratzscher.pdf full text
Journal Article: Towards a new early warning system of financial crises (2006)
Working Paper: Towards a new early warning system of financial crises (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ecj:ac2003:81
Access Statistics for this paper
More papers in Royal Economic Society Annual Conference 2003 from Royal Economic Society Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().