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Toward robust early-warning models: a horse race, ensembles and model uncertainty

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  • Markus Holopainen
  • Peter Sarlin

Abstract

This paper presents first steps towards robust models for crisis prediction. We conduct a horse race of conventional statistical methods and more recent machine learning methods as early-warning models. As individual models are in the literature most often built in isolation of other methods, the exercise is of high relevance for assessing the relative performance of a wide variety of methods. Further, we test various ensemble approaches to aggregating the information products of the built models, providing more robust basis for measuring country-level vulnerabilities. Finally, we provide approaches to estimating model uncertainty in early-warning exercises, particularly model performance uncertainty and model output uncertainty. The approaches put forward in this paper are shown with Europe as a playground. Generally, our results show that the conventional statistical approaches are outperformed by more advanced machine learning methods, such as k-nearest neighbours and neural networks, and particularly by model aggregation approaches through ensemble learning.

Suggested Citation

  • Markus Holopainen & Peter Sarlin, 2017. "Toward robust early-warning models: a horse race, ensembles and model uncertainty," Quantitative Finance, Taylor & Francis Journals, vol. 17(12), pages 1933-1963, December.
  • Handle: RePEc:taf:quantf:v:17:y:2017:i:12:p:1933-1963
    DOI: 10.1080/14697688.2017.1357972
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    References listed on IDEAS

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