Optimizing policymakers' loss functions in crisis prediction: before, within or after? / Peter Sarlin; Gregor von Schweinitz
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Optimizing policymakers` loss functions in crisis prediction: before, within or after?
Discovery
827504144
URN
urn:nbn:de:gbv:3:2-48552
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Publication history
Halle (Saale) : Leibniz-Inst. für Wirtschaftsforschung - IWH, 2015
Content
Online-Ressource (PDF-Datei: IV, 28 S., 0,62 MB) : graph. Darst.
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Language
eng
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ger
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Abstract
Early-warning models most commonly optimize signaling thresholds on crisis probabilities. The ex-post threshold optimization is based upon a loss function accounting for preferences between forecast errors, but comes with two crucial drawbacks: unstable thresholds in recursive estimations and an in-sample overfit at the expense of out-ofsample performance. We propose two alternatives for threshold setting: (i) including preferences in the estimation itself and (ii) setting thresholds ex-ante according to preferences only. We provide simulated and real-world evidence that this simplification results in stable thresholds and improves out-of-sample performance. Our solution is not restricted to binary-choice models, but directly transferable to the signaling approach and all probabilistic early-warning models.
Series
IWH-Diskussionspapiere ; 2015,6 ppn:837399270