Early warning systems for sovereign debt crises: The role of heterogeneity
Computational Statistics & Data Analysis
Early-warning analysis for currency crises in emerging markets: A revisit with fuzzy clustering
International Journal of Intelligent Systems in Accounting and Finance Management
Neuro-Genetic Predictions Of Currency Crises
International Journal of Intelligent Systems in Accounting and Finance Management
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By focusing on sovereign defaults, this paper introduces a multidimensional distance-to-collapse point based on a two-step procedure. The first step is nonparametric and provides an early warning system that signals a potential crisis whenever preselected leading indicators exceed specific thresholds. The second is parametric and incorporates the first-step country default predictors within a probit specification. Such a two-step procedure generalizes the distance-to-default à la Merton within a multidimensional setting, wherein we care about the distance of each indicator from its threshold. Empirical evidence about debt crises of emerging markets over the period 1975–2002 proves that our methodology predicts 80% of the total defaults and non-defaults in and out of sample. Copyright © 2012 John Wiley & Sons, Ltd.