Signaling Crises: How to Get Good Out-of-Sample Performance Out of the Early Warning System

Gregor von Schweinitz and Peter Sarlin

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: In past years, the most common approaches for deriving early-warning models belong to the family of binary-choice methods, which have been coupled with a separate loss function to optimize model signals based on policymakers preferences. The evidence in this paper shows that early-warning models should not be used in this traditional way, as the optimization of thresholds produces an in-sample overfit at the expense of out-of-sample performance. Instead of ex-post threshold optimization based upon a loss function, policymakers' preferences should rather be directly included as weights in the estimation function. Doing this strongly improves the out-of-sample performance of early-warning systems.

JEL-codes: C35 C53 G01 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ecm and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:112964

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