Early-Warning Systems: A Survey and a Regime-Switching Approach

By Abdul Abiad. Social Science Research Network, 2003

256 citations recorded by the source corpus.

Previous early-warning systems (EWSs) for currency crises have relied on models that require a priori dating of crises. This paper proposes an alternative EWS, based on a Markov-switching model, which identifies and characterizes crisis periods endogenously; this also allows the model to utilize information contained in exchange rate dynamics. The model is estimated using data for the period 1972-99 for the Asian crisis countries, taking a country-by-country approach. The model outperforms standard EWSs, both in signaling crises and reducing false alarms. Two lessons emerge. First, accounting for the dynamics of exchange rates is important. Second, different indicators matter for different countries, suggesting that the assumption of parameter constancy underlying panel estimates of EWSs may contribute to poor performance.

Subfields: Artificial Intelligence, Epidemiology

View Paper: https://www.semanticscholar.org/paper/4109b14b84adf3b632528b7f28305c9082ab8489

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Citations in the corpus

Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis (2010, methodology): “Appendix 1 Criteria Used to Identify Variable as Significant in Table 1 Study Criteria used/Variables Included Studies in Abiad (2003) Berg and Pattillo (1999b) Indicators that are statistically signficant in 2 out of the 3 probit models used Bruggemann and Linne (2000) No statistical test on…”
Economic growth and currency crisis: A real exchange rate entropic approach (2005, background): “Most of the empirical literature has focused on identification, prediction and contagion of currency crisis, see Kaminsky, Lizondo and Reinhart (1998) and Abiad (2003) for two comprehensive surveys.”
Assessing Early Warning Systems: How Have They Worked in Practice? (2004, methodology): “More recently, other models have been developed in the IMF, such as Mulder, Perrelli, and Rocha (2002) and Abiad (2003).”
External Liabilities and Crises (2013, unknown): “Yet, disparate definitions of currency crises and sample selection criteria as well as weak predictive performance have also been widely recognized as Achilles heels of this literature (e.g., Berg and Pattillo, 1999; Abiad, 2003; Edison, 2003).”
Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis (2012, background): “KLR (1998) include variables that have been found to be significant in at least one of the tests conducted in each paper, Hawkins and Klau (2000) use varying criteria, and we identify those variables that are statistically significant in the absolute majority of the different regressions or other es”
The Global Financial Crisis and currency crises in Latin America (2012, methodology): “To quote Abiad (2003): “The one-size-fits-all, panel data approach used in estimating most Early Warning Systems (EWS) might be one of the causes of their only moderate success”.”
How to Evaluate an Early-Warning System: Toward a Unified Statistical Framework for Assessing Financial Crises Forecasting Methods (2010, background): “Hence, Bussiere and Fratzscher (2006) propose a multinomial logit EWS, whereas other studies use Markov-Switching models (see Abiad, 2003, Martinez-Peria, 2002 and Fratzcher, 2003).”