Comparing Different Early Warning Systems: Results from a Horse Race Competition Among Members of the Macro-Prudential Research Network

27 Pages Posted: 18 Feb 2015

See all articles by Lucia Alessi

Lucia Alessi

European Central Bank (ECB)

Antonio Antunes

Bank of Portugal - Department of Economics

Jan Babecký

Czech National Bank (CNB)

Simon Baltussen

De Nederlandsche Bank

Markus Behn

European Central Bank (ECB)

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Oliver Bush

London School of Economics & Political Science (LSE); Bank of England

Carsten Detken

European Central Bank (ECB)

Jon Frost

Bank for International Settlements; University of Cambridge - Cambridge Centre for Alternative Finance

Rodrigo Guimaraes

Bank of England

Tomas Havranek

Charles University in Prague; Centre for Economic Policy Research (CEPR)

Mark Joy

University of Glasgow - Department of Economics

Karlo Kauko

Bank of Finland

Jakub Mateju

Charles University in Prague - CERGE-EI; Czech National Bank (CNB)

Nuno Monteiro

Bank of Portugal

Benjamin Neudorfer

Oesterreichische Nationalbank (OeNB)

Tuomas A. Peltonen

European Central Bank (ECB)

Marek Rusnak

Czech National Bank (CNB); Charles University in Prague

Paulo M.M. Rodrigues

Banco de Portugal

Willem Schudel

European Central Bank (ECB)

Michael Sigmund

Oesterreichische Nationalbank (OeNB)

Hanno Stremmel

WHU - Otto Beisheim School of Management

Katerina Smidkova

Czech National Bank (Deceased); Charles University - Economics Department (Deceased)

Ruben van Tilburg

De Nederlandsche Bank

Borek Vasicek

Czech National Bank (CNB); European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Diana Zigraiova

Charles University in Prague; European Stability Mechanism

Date Written: February 1, 2015

Abstract

Over the recent decades researchers in academia and central banks have developed early warning systems (EWS) designed to warn policy makers of potential future economic and financial crises. These EWS are based on diverse approaches and empirical models. In this paper we compare the performance of nine distinct models for predicting banking crises resulting from the work of the Macroprudential Research Network (MaRs) initiated by the European System of Central Banks. In order to ensure comparability, all models use the same database of crises created by MaRs and comparable sets of potential early warning indicators. We evaluate the models’ relative usefulness by comparing the ratios of false alarms and missed crises and discuss implications for practical use and future research. We find that multivariate models, in their many appearances, have great potential added value over simple signalling models. One of the main policy recommendations coming from this exercise is that policy makers can benefit from taking a broad methodological approach when they develop models to set macro-prudential instruments.

Keywords: Early warning systems, financial crisis, Bayesian model averaging

JEL Classification: G01

Suggested Citation

Alessi, Lucia and Antunes, Antonio and Babecky, Jan and Baltussen, Simon and Behn, Markus and Bonfim, Diana and Bush, Oliver and Detken, Carsten and Frost, Jon and Guimaraes, Rodrigo and Havranek, Tomas and Joy, Mark and Kauko, Karlo and Mateju, Jakub and Monteiro, Nuno and Neudorfer, Benjamin and Peltonen, Tuomas A. and Rusnak, Marek and Marques Rodrigues, Paulo Manuel and Schudel, Willem and Sigmund, Michael and Stremmel, Hanno and Smidkova, Katerina and van Tilburg, Ruben and Vasicek, Borek and Zigraiova, Diana, Comparing Different Early Warning Systems: Results from a Horse Race Competition Among Members of the Macro-Prudential Research Network (February 1, 2015). Available at SSRN: https://ssrn.com/abstract=2566165 or http://dx.doi.org/10.2139/ssrn.2566165

Lucia Alessi

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Antonio Antunes

Bank of Portugal - Department of Economics ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Jan Babecky

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Simon Baltussen

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Markus Behn

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Diana Bonfim

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Oliver Bush

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Carsten Detken

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0049 69 1344 6000 (Fax)

Jon Frost

Bank for International Settlements ( email )

Basel
Switzerland

University of Cambridge - Cambridge Centre for Alternative Finance ( email )

10 Trumpington Street
Cambridge, CB21QA
United Kingdom

Rodrigo Guimaraes

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tomas Havranek

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Mark Joy

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

Karlo Kauko

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Jakub Mateju

Charles University in Prague - CERGE-EI ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

HOME PAGE: http://www.cerge-ei.cz

Czech National Bank (CNB)

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Nuno Monteiro

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Benjamin Neudorfer

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3
1090 Vienna
Austria

Tuomas A. Peltonen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marek Rusnak

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

Charles University in Prague

Celetná 13
Praha 1, 116 36
Czech Republic

Paulo Manuel Marques Rodrigues

Banco de Portugal ( email )

R. do Ouro, 27
Lisboa, 1100-150
Portugal

Willem Schudel

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Michael Sigmund

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

Hanno Stremmel

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Katerina Smidkova

Czech National Bank (Deceased)

Charles University - Economics Department (Deceased)

Ruben van Tilburg

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Borek Vasicek

Czech National Bank (CNB) ( email )

Na Prikope 28
CZ-11503 Praha 1
Czech Republic

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

BU-1 05/190
Brussels, Bruxelles B-1049
Belgium

Diana Zigraiova (Contact Author)

Charles University in Prague ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

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