Modeling Sovereign Debt Crises Using Panels

CEA Working Paper No. 11-2004

Cass Business School Research Paper

41 Pages Posted: 29 Dec 2004

See all articles by Ana-Maria Fuertes

Ana-Maria Fuertes

Cass Business School, City University of London

Elena Kalotychou

Cass Business School, City, University of London

Date Written: December 13, 2004

Abstract

This paper compares rival sovereign default models that differ in how country-, region- and time-specific effects are treated. The quality of the models is gauged using inference-based criteria and the plausibility of estimates. An out-of-sample forecast evaluation framework is deployed based on statistical- and economic-loss functions, naive benchmarks and equal-predictive-ability tests. The inference metrics overwhelmingly favor more complex models that allow for time-varying country heterogeneity. However, simplicity beats complexity in terms of forecasting. Pooled logit models that simply control either for regional heterogeneity or for time effects produce the most accurate forecasts and outperform the naive models.

Keywords: Panel logit, unobserved heterogeneity, economic loss, predictive performance

JEL Classification: C15, C32, C33

Suggested Citation

Fuertes, Ana-Maria and Kalotychou, Elena, Modeling Sovereign Debt Crises Using Panels (December 13, 2004). CEA Working Paper No. 11-2004, Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=634061 or http://dx.doi.org/10.2139/ssrn.634061

Ana-Maria Fuertes (Contact Author)

Cass Business School, City University of London ( email )

Faculty of Finance
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 207 477 0186 (Phone)
+44 207 477 8881 (Fax)

HOME PAGE: http://www.city.ac.uk/people/academics/ana-maria-fuertes

Elena Kalotychou

Cass Business School, City, University of London ( email )

106 Bunhill Row
London, EC1Y 8TZ
Great Britain

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