Do Indicators of Financial Crises Work? An Evaluation of an Early Warning System

Abstract

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.

Macroeconomic Imbalances as Indicators for Debt Crises in Europe*

“…There is probably a considerable difference between a value of 0.4 and a value of 1.0 for the composite indicator (a value of 1.0 would mean that all the components of the indicator are sending a signal of existing imbalances). Because of this, we also look at the probability of having a crisis within the next 24 months if the value of the composite indicator falls into a predefined interval, as discussed by Edison (2003), Kaminsky (1999) and Brüggemann and Linne (2002). Using the estimated probabilities and the actual realizations of a crisis, we can calculate the quadratic probability score, as described by Brier (1950), Diebold and Rudebusch (1989) and Brüggemann and Linne (2002).…”

An integrated early warning system for stock market turbulence

“…Alternatively, Eichengreen et al (1995) propose to use the Financial Pressure Index (FPI) to measure the gross foreign exchange reserves of the Central Bank and the repo rate (Sevim et al, 2014). Currency crises are thus identified as the FPI raises more than 1.5 (Kibritcioglu et al, 1999), 2 (Eichengreen et al, 1995;Bussiere and Fratzscher, 2006), 2.5 (Edison, 2003) or, 3 (Kaminsky and Reinhart, 1999;Berg and Pattillo, 1999;Duan and Bajona, 2008)) standard deviations from its long-term mean. In the context of stock EWS, market crashes are indicated by the CMAX index falling below its mean by 2 (Coudert and Gex, 2008), 2.5 (Li et al, 2015), or 3 (Fu et al, 2019) standard deviations.…”

Cari̇ Açiklarla Mücadelede Turi̇zm Sektörü Ve Türki̇ye Anali̇zi̇

“…Cari işlemler dengesinin ülke ekonomisinin sürdürülebilirliği konusunda da önemli bilgiler sunduğunu söyleyen bilim adamları da vardır. Edison (2003) ve Zanghieri (2004) Cari açıklarla ilgili olarak önem arz eden bir konuda bu açıkların ülkeler için ne zamana kadar sürdürülebilir ya da katlanılabilir bir yapı oluşturacağıdır. Cari açıkların ülke ekonomisi için bir tehlike oluşturacağı düzeyin belirlenmesinde en yaygın kullanılan araç cari açık/milli gelir oranı olmaktadır.…”