How To Evaluate an Early Warning System? Towards a unified Statistical Framework for Assessing Financial Crises Forecasting Methods

By Candelon Bertrand, Dumitrescu Elena-Ivona, and Hurlin Christophe
IMF Economic Review (2012)

  • Christophe Hurlin

    University of Orléans

    France

  • Elena-Ivona Dumitrescu

    University Paris Ouest

    France

  • Bertrand Candelon

    Maastricht University

    Netherlands

Created

September 28, 2013

Last update

September 28, 2013

Software

Matlab

Ranking

32

Visits

4616

Downloads

359

Description

This original model free toolbox evaluates the forecasting abilities of an Early Warning System (EWS) or those of two competing EWS. First, it finds the optimal cut-off, the one that best discriminates between crisis and calm periods. Second, it computes several evaluation criteria for the predictive abilities of the EWS. If two models are considered, it evaluates each model and then uses comparison tests to identify the outperforming one. The code relies on 2 series (optionally, 3 series and the choice nested/non nested models). The first one is the observed crisis (binary, taking the values of 0 and 1). The second one is a series of probabilities issued from any type of EWS. Another series of probabilities (a 2nd EWS) must be provided if 2 EWS are to be compared.

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