Nothing Special   »   [go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/p/zbw/iwhdps/iwh-3-12.html
   My bibliography  Save this paper

Predicting Financial Crises: The (Statistical) Significance of the Signals Approach

Author

Listed:
  • El-Shagi, Makram
  • Knedlik, Tobias
  • von Schweinitz, Gregor
Abstract
The signals approach as an early warning system has been fairly successful in detecting crises, but it has so far failed to gain popularity in the scientific community because it does not distinguish between randomly achieved in-sample fit and true predictive power. To overcome this obstacle, we test the null hypothesis of no correlation between indicators and crisis probability in three applications of the signals approach to different crisis types. To that end, we propose bootstraps specifically tailored to the characteristics of the respective datasets. We find (1) that previous applications of the signals approach yield economically meaningful and statistically significant results and (2) that composite indicators aggregating information contained in individual indicators add value to the signals approach, even where most individual indicators are not statistically significant on their own.

Suggested Citation

  • El-Shagi, Makram & Knedlik, Tobias & von Schweinitz, Gregor, 2012. "Predicting Financial Crises: The (Statistical) Significance of the Signals Approach," IWH Discussion Papers 3/2012, Halle Institute for Economic Research (IWH).
    • Handle: RePEc:zbw:iwhdps:iwh-3-12
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/57650/1/690231482.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rose, Andrew K. & Spiegel, Mark M., 2011. "Cross-country causes and consequences of the crisis: An update," European Economic Review, Elsevier, vol. 55(3), pages 309-324, April.
    2. Frankel, Jeffrey A & Rose, Andrew K, 1996. "Currency Crashes in Emerging Markets: Empirical Indicators," CEPR Discussion Papers 1349, C.E.P.R. Discussion Papers.
    3. Tobias Knedlik & Gregor Von Schweinitz, 2012. "Macroeconomic Imbalances as Indicators for Debt Crises in Europe," Journal of Common Market Studies, Wiley Blackwell, vol. 50(5), pages 726-745, September.
    4. Brüggemann, Axel & Linne, Thomas, 2002. "Are the Central and Eastern European Transition Countries still vullnerable to an Financial Crisis? Results from the Signals Approach," IWH Discussion Papers 157/2002, Halle Institute for Economic Research (IWH).
    5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    6. Alessi, Lucia & Detken, Carsten, 2011. "Quasi real time early warning indicators for costly asset price boom/bust cycles: A role for global liquidity," European Journal of Political Economy, Elsevier, vol. 27(3), pages 520-533, September.
    7. Hali J. Edison, 2003. "Do indicators of financial crises work? An evaluation of an early warning system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 11-53.
    8. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    9. Kristina Kittelmann & Marcel Tirpak & Rainer Schweickert & Lúcio Vinhas De Souza, 2006. "From Transition Crises to Macroeconomic Stability? Lessons from a Crises Early Warning System for Eastern European and CIS Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 48(3), pages 410-434, September.
    10. Jushan Bai & Serena Ng, 2005. "Tests for Skewness, Kurtosis, and Normality for Time Series Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 49-60, January.
    11. Graciela Kaminsky & Saul Lizondo & Carmen M. Reinhart, 1998. "Leading Indicators of Currency Crises," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 1-48, March.
    12. Filardo, Andrew J, 1994. "Business-Cycle Phases and Their Transitional Dynamics," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 299-308, July.
    13. repec:bla:obuest:v:61:y:1999:i:0:p:631-52 is not listed on IDEAS
    14. Bussiere, Matthieu & Fratzscher, Marcel, 2008. "Low probability, high impact: Policy making and extreme events," Journal of Policy Modeling, Elsevier, vol. 30(1), pages 111-121.
    15. Mr. Abdul d Abiad, 2003. "Early Warning Systems: A Survey and a Regime-Switching Approach," IMF Working Papers 2003/032, International Monetary Fund.
    16. repec:zbw:bofitp:2002_005 is not listed on IDEAS
    17. Peng, Duan & Bajona, Claustre, 2008. "China's vulnerability to currency crisis: A KLR signals approach," China Economic Review, Elsevier, vol. 19(2), pages 138-151, June.
    18. Kumar, Mohan & Moorthy, Uma & Perraudin, William, 2003. "Predicting emerging market currency crashes," Journal of Empirical Finance, Elsevier, vol. 10(4), pages 427-454, September.
    19. Fitzenberger, Bernd, 1998. "The moving blocks bootstrap and robust inference for linear least squares and quantile regressions," Journal of Econometrics, Elsevier, vol. 82(2), pages 235-287, February.
    20. Tobias Knedlik & Rolf Scheufele, 2008. "Forecasting Currency Crises: Which Methods Signaled The South African Crisis Of June 2006?," South African Journal of Economics, Economic Society of South Africa, vol. 76(3), pages 367-383, September.
    21. Mariano Roberto S & Gultekin Bulent N & Ozmucur Suleyman & Shabbir Tayyeb & Alper C. Emre, 2004. "Prediction of Currency Crises: Case of Turkey," Review of Middle East Economics and Finance, De Gruyter, vol. 2(2), pages 1-21, August.
    22. Kaminsky, Graciela L., 2006. "Currency crises: Are they all the same?," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 503-527, April.
    23. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "Currency crashes in emerging markets: An empirical treatment," Journal of International Economics, Elsevier, vol. 41(3-4), pages 351-366, November.
    24. Bussiere, Matthieu & Fratzscher, Marcel, 2006. "Towards a new early warning system of financial crises," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 953-973, October.
    25. Claudio Borio & Mathias Drehmann, 2009. "Assessing the risk of banking crises - revisited," BIS Quarterly Review, Bank for International Settlements, March.
    26. Berg, Andrew & Pattillo, Catherine, 1999. "Predicting currency crises:: The indicators approach and an alternative," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 561-586, August.
    27. Graciela Laura Kaminsky, 1999. "Currency and Banking Crises: The Early Warnings of Distress," IMF Working Papers 1999/178, International Monetary Fund.
    28. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Panayotis Michaelides & Mike Tsionas & Panos Xidonas, 2020. "A Bayesian Signals Approach for the Detection of Crises," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 18(3), pages 551-585, September.
    2. Geraldine Dany-Knedlik & Martina Kämpfe & Tobias Knedlik, 2021. "The appropriateness of the macroeconomic imbalance procedure for Central and Eastern European Countries," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(1), pages 123-139, February.
    3. Christofides, Charis & Eicher, Theo S. & Papageorgiou, Chris, 2016. "Did established Early Warning Signals predict the 2008 crises?," European Economic Review, Elsevier, vol. 81(C), pages 103-114.
    4. Ari, Ali, 2012. "Early warning systems for currency crises: The Turkish case," Economic Systems, Elsevier, vol. 36(3), pages 391-410.
    5. Mustapha Djennas & Mohamed Benbouziane & Meriem Djennas, 2011. "An Approach of Combining Empirical Mode Decomposition and Neural Network Learning for Currency Crisis Forecasting," Working Papers 627, Economic Research Forum, revised 09 Jan 2011.
    6. Lanbiao Liu & Chen Chen & Bo Wang, 2022. "Predicting financial crises with machine learning methods," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(5), pages 871-910, August.
    7. Betz, Frank & Oprică, Silviu & Peltonen, Tuomas A. & Sarlin, Peter, 2014. "Predicting distress in European banks," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 225-241.
    8. Knedlik, Tobias & Scheufele, Rolf, 2007. "Three methods of forecasting currency crises: Which made the run in signaling the South African currency crisis of June 2006?," IWH Discussion Papers 17/2007, Halle Institute for Economic Research (IWH).
    9. Markus Holopainen & Peter Sarlin, 2015. "Toward robust early-warning models: A horse race, ensembles and model uncertainty," Papers 1501.04682, arXiv.org, revised Apr 2016.
    10. Kauko, Karlo, 2014. "How to foresee banking crises? A survey of the empirical literature," Economic Systems, Elsevier, vol. 38(3), pages 289-308.
    11. Yanping Zhao & Jakob Haan & Bert Scholtens & Haizhen Yang, 2014. "Leading Indicators of Currency Crises: Are They the Same in Different Exchange Rate Regimes?," Open Economies Review, Springer, vol. 25(5), pages 937-957, November.
    12. Wang, Peiwan & Zong, Lu, 2023. "Does machine learning help private sectors to alarm crises? Evidence from China’s currency market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 611(C).
    13. Mpho Bosupeng, 2018. "Leading Indicators and Financial Crisis: A Multi-Sectoral Approach Using Signal Extraction," Journal of Empirical Studies, Conscientia Beam, vol. 5(1), pages 20-44.
    14. Tobias Knedlik & Rolf Scheufele, 2008. "Forecasting Currency Crises: Which Methods Signaled The South African Crisis Of June 2006?," South African Journal of Economics, Economic Society of South Africa, vol. 76(3), pages 367-383, September.
    15. Cumperayot, Phornchanok & Kouwenberg, Roy, 2013. "Early warning systems for currency crises: A multivariate extreme value approach," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 151-171.
    16. Sarlin, Peter & von Schweinitz, Gregor, 2021. "Optimizing Policymakers’ Loss Functions In Crisis Prediction: Before, Within Or After?," Macroeconomic Dynamics, Cambridge University Press, vol. 25(1), pages 100-123, January.
    17. Catão, Luis A.V. & Milesi-Ferretti, Gian Maria, 2014. "External liabilities and crises," Journal of International Economics, Elsevier, vol. 94(1), pages 18-32.
    18. Pham, Thi Hoang Anh, 2017. "Are global shocks leading indicators of currency crisis in Viet Nam?," Research in International Business and Finance, Elsevier, vol. 42(C), pages 605-615.
    19. Frankel, Jeffrey & Saravelos, George, 2012. "Can leading indicators assess country vulnerability? Evidence from the 2008–09 global financial crisis," Journal of International Economics, Elsevier, vol. 87(2), pages 216-231.
    20. Tobias Knedlik & Gregor Von Schweinitz, 2012. "Macroeconomic Imbalances as Indicators for Debt Crises in Europe," Journal of Common Market Studies, Wiley Blackwell, vol. 50(5), pages 726-745, September.

    More about this item

    Keywords

    early warning system; signals approach; bootstrap; Frühwarnsysteme; Signalansatz; Bootstrap-Methoden;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F01 - International Economics - - General - - - Global Outlook

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:iwhdps:iwh-3-12. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/iwhhhde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.