Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies
We compare how logit (fi xed effects) and probit early warning systems (EWS) predict in-sample and out-of-sample currency crises in emerging markets (EMs). We look at episodes of currency crises that took place in 29 EMs between January 1995 and December 2012. Stronger real GDP growth rates and h...
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| Main Author: | |
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| Format: | Article |
| Language: | English |
| Published: |
University of Warsaw
2016-06-01
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| Series: | Journal of Banking and Financial Economics |
| Subjects: | |
| Online Access: | https://press.wz.uw.edu.pl/cgi/viewcontent.cgi?article=1071&context=jbfe |
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| Summary: | We compare how logit (fi xed effects) and probit early warning systems (EWS) predict in-sample
and out-of-sample currency crises in emerging markets (EMs). We look at episodes of currency
crises that took place in 29 EMs between January 1995 and December 2012. Stronger real GDP
growth rates and higher net foreign assets signifi cantly reduce the probability of experiencing
a currency crisis, while high levels of credit to the private sector increase it. We fi nd that the logit
and probit EWS out-of-sample performances are broadly similar, and that the EWS performance
can be very sensitive both to the size of the estimation sample, and to the crisis defi nition
employed. For macroeconomic policy purposes, we conclude that a currency crisis defi nition
identifying more rather than less crisis episodes should be used, even if this may lead to the risk
of issuing false alarms. |
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| ISSN: | 2353-6845 |