Do Indicators of Financial Crises Work? An Evaluation of an Early Warning System
By Hali J. Edison. 2000
463 citations recorded by the source corpus.
The object of this paper is to develop an operational early warning system (EWS) that can detect financial crises. To achieve this goal the paper analyzes and extends the early warning system developed by Kaminsky, Lizondo, and Reinhart (1998) and Kaminsky and Reinhart (1999) that is based on the "signal" approach. This system monitors several indicators that tend to exhibit an unusual behavior in the periods preceding a crisis. When an indicator exceeds (or falls below) a threshold, then it is said to issue a "signal" that a currency crisis may occur within a given period. The model does a fairly good job of anticipating some of the crises in 1997/1998, but several weaknesses to the approach are identified. The paper also evaluates how this system can be applied to an individual country. On balance, the results in this paper are mixed, but the results suggest that an early warning system should be thought of as a useful diagnostic tool.
View Paper: https://www.semanticscholar.org/paper/685ebf9f3b867ed51feb442e28e5408a740695b7
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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): “The second category, known as the non-parametric, indicators, or signals approach was first popularized by KLR (1998) and further developed in studies such as Bruggemann and Linne (2000) and Edison (2003).”
- Assessing systemic risks and predicting systemic events (2013, methodology): “Berg and Pattillo (2000), Edison (2003) and Berg et al. (2005) use the methodology of Kaminsky and Reinhart (1999)5 and a more general probit model for the out-of-sample prediction of the Asian crisis with encouraging results.”
- Theory and Applications of TAR Model with Two Threshold Variables (2012, background): “In modelling currency crises, Sachs et al. (1996), Frankel and Rose (1996), Kaminsky (1998) and Edison (2000) argue that the occurrence of currency crises hints at the values of fiscal reserves, foreign reserves and interest rate differential between home countries and the U.S..”
- Asset Prices, Financial and Monetary Stability: Exploring the Nexus (2002, unknown): “Edison (2000) provides an easy to follow exposition.”
- Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis (2012, unknown): “The second category, known as the non-parametric, indicators, or signals approach was first popularized by KLR (1998) and further developed by Brüggemann and Linne (1999), Edison (2003) and others.”
- MEASURING POTENTIAL VULNERABILITIES IN EMERGING MARKET ECONOMIES (2000, methodology): “ER: indicators significant in Eichengreen and Rose (1998). Ros: indicators significant in regressions of banking crises in Rossi (1999). GKR: indicators with lowest signal-to-noise ratios as predicators of banking crises in Goldstein et al (2000). Gold: indicators with best track record according to”
- The Transmission of Financial Stress from Advanced to Emerging Economies (2009, background): “The main papers surveyed are Calvo et al. (2008), Chamon et al. (2007), Demirgüç-Kunt et al. (2006), Edison (2003), Eichengreen and Bordo (2002), Honohan and Laeven (2005), Kaminsky and Reinhart (1999), Laeven and Valencia (2008), Reinhart and Reinhart (2009), Reinhart and Rogoff (2008, 2009), and…”
- Predicting Distress in European Banks (2014, background): “Many later studies, such as Berg and Pattillo (1999a) and Edison (2003), while introducing a discrete-choice model, do not adopt a structured approach to evaluate model performance.”