Spotting the Danger Zone - Forecasting Financial Crises with Classification Tree Ensembles and Many Predictors

Felix Ward

No 01/2014, Bonn Econ Discussion Papers from University of Bonn, Bonn Graduate School of Economics (BGSE)

Abstract: To improve the detection of the economic ”danger zones” from which severe banking crises emanate, this paper introduces classification tree ensembles to the banking crisis forecasting literature. I show that their out-of-sample performance in forecasting binary banking crisis indicators surpasses current best-practice early warning systems based on logit models by a substantial margin. I obtain this result on the basis of one long-run- (1870-2011), as well as two broad post-1970 macroeconomic panel datasets. I particularly show that two marked improvements in forecasting performance result from the combination of many classification trees into an ensemble, and the use of many predictors.

JEL-codes: C53 E50 G01 N10 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bonedp:012014

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