Incorporating Financial Development Indicators Into Early Warning Systems

18 Pages Posted: 10 Jul 2020

Date Written: June 17, 2020

Abstract

We set up an early warning system for financial crises based on the Random Forrest approach. We use a novel set of predictors that comprises financial development indicators (e.g. levels of credit to GDP ratio) in addition to conventional imbalances measures (e.g. credit gaps). The evaluation of the model is conducted using a three-step procedure (i.e. training, validation and testing sub-samples). The results indicate that combining financial imbalances and financial development indicators helps to improve the out-of-sample accuracy of the early warning system.

Keywords: Early warning indicators, financial crisis, financial development, credit gap, random forest

JEL Classification: C40, C52, G01, E44

Suggested Citation

Ponomarenko, Alexey and Tatarintsev, Stas, Incorporating Financial Development Indicators Into Early Warning Systems (June 17, 2020). Available at SSRN: https://ssrn.com/abstract=3629372 or http://dx.doi.org/10.2139/ssrn.3629372

Alexey Ponomarenko (Contact Author)

Bank of Russia ( email )

12 Neglinnaya Street
Moscow, 107016
Russia

Stas Tatarintsev

Bank of Russia ( email )

12 Neglinnaya Street
Moscow, 107016
Russia

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