Indicators of Financial Crises Do Work! An Early-Warning System for Six Asian Countries

Abstract

Indicators of financial crisis generally do not have a good track record. This paper presents an early warning system for six countries in Asia, in which indicators do work. We distinguish three types of financial crises, currency crises, banking crises and debt crises, and extract four groups of indicators from the literature - external, financial, domestic (real and public), and global indicators - that are likely to affect the probability of financial crises. The significance of the indicator groups is tested in a multivariate logit model on a panel of six Asian countries for the period 1970:01-2001:12. An additional feature is that we examine four different currency crisis dating definitions. A within-sample signal extraction experiment reveals that some currency crises dating schemes outperform others.

Keywords: Financial crises, currency crises, banking crises, debt crises, early warning system, panel data, multivariate logit, factor analysis

JEL Classification: C33, C35, F31, F34, F47