Keywords
Early warning systems; currency crises; out-of-sample performance
Abstract
We compare how logit (fixed 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 significantly reduce the probability of experiencing a currency crisis, while high levels of credit to the private sector increase it. We find 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 definition employed. For macroeconomic policy purposes, we conclude that a currency crisis definition identifying more rather than less crisis episodes should be used, even if this may lead to the risk of issuing false alarms.
Recommended Citation
Comelli, F. (2024). Comparing the Performance of Logit and Probit Early Warning Systems for Currency Crises in Emerging Market Economies. Journal of Banking and Financial Economics, 2016(6), 5-22. https://doi.org/10.7172/2353-6845.jbfe.2016.2.1
First Page
5
Last Page
22
Page Count
18
Received Date
University of Warsaw
Revised Date
23 January 2016
Accept Date
13 April 2016
Online Available Date
16 June 2016
DOI
10.7172/2353-6845.jbfe.2016.2.1
JEL Code
F30; F32; F37
Publisher
16 June 2016