Modeling Sovereign Debt Crises Using Panels
CEA Working Paper No. 11-2004
41 Pages Posted: 29 Dec 2004
Date Written: December 13, 2004
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
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