Early Warning Systems for Banking Crisis and Sovereign Risk

Optimal design of early warning systems for sovereign debt crises

This paper tackles the design of an optimal early warning system (EWS) for sovereign default from two distinct angles: the choice of the econometric methodology and the evaluation of the EWS itself. It compares K-means clustering of macrodata, a logit regression for macrodata, a logit regression for credit ratings, and the combined forecasts from all three methods. The optimal choice of forecas...

Currency crisis early warning systems: Why they should be dynamic

Traditionally, financial crisis EarlyWarning Systems (EWSs) have relied onmacroeconomic leading indicatorswhen forecasting the occurrence of such events. This paper extends such discrete-choice EWSs by taking the persistence of the crisis phenomenon into account. The dynamic logit EWS is estimated using an exact maximum likelihood estimation method in both a country-by-country and a panel frame...

Early warning systems for sovereign debt crises: The role of heterogeneity

Sovereign defaultmodels that differ in their treatment of unobservable country, regional and time heterogeneities are systematically compared. The analysis is based on annual data over the 1983–2002 period for 96 developing economies. Inference-based criteria and parameter plausibility overwhelmingly favour more complex models that allow the link between the probability response and the fundame...

An early warning on early warning systems!

A Review of the Literature on Early Warning Systems for Banking Crises

This paper presents a review of alternative methodologies for early detection of banking distress. The methodologies proposed are aimed to the early identification of financial distress for countries without an important recent history of bank failure, but facing an unstable international environment. We evaluate several indicators and methodologies to measure financial distress such as qualita...