Early warning systems for sovereign debt crises: The role of heterogeneity
Journal
Computational Statistics and Data Analysis
Date Issued
November 15, 2006
Author(s)
DOI
10.1016/j.csda.2006.08.023
Abstract
Sovereign default models that differ in their treatment of unobservable country, regional and time heterogeneities are systematically compared. The analysis is based on annual data over the 1983-2002 period for 96 developing economies. Inference-based criteria and parameter plausibility overwhelmingly favour more complex models that allow the link between the probability response and the fundamentals to vary over time and across countries. However, out-of-sample forecast evaluation using several loss functions and equal-predictive-ability tests suggests that simplicity beats complexity. Parsimonious pooled logit models produce the most accurate sovereign default forecasts and outperform the naive benchmarks.