Optimizing policymakers' loss functions in crisis prediction: before, within or after?
"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...
| Main Authors: | , |
|---|---|
| Institution: | ETUI-European Trade Union Institute |
| Format: | TEXT |
| Language: | English |
| Published: |
Frankfurt am Main
2017
ECB |
| Subjects: | |
| Online Access: | https://www.labourline.org/KENTIKA-753412457169-optimizing-policymakers-loss-f.htm |
| _version_ | 1771659902812422145 |
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| author | Sarlin, Peter von Schweinitz, Gregor |
| author_facet | Sarlin, Peter von Schweinitz, Gregor |
| collection | Library items |
| description | "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-of-sample 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. Given probabilistic model output, it is intuitive that a decision rule is independent of the data or model specification, as thresholds on probabilities represent a willingness to issue a false alarm vis-à-vis missing a crisis. 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." |
| format | TEXT |
| id | 753412457169_90b7d47bf751407cacff67f253d2b9fc |
| institution | ETUI-European Trade Union Institute |
| is_hierarchy_id | 753412457169_90b7d47bf751407cacff67f253d2b9fc |
| is_hierarchy_title | Optimizing policymakers' loss functions in crisis prediction: before, within or after? |
| language | English |
| physical | 29 p. Digital |
| publishDate | 2017 |
| publisher | Frankfurt am Main ECB |
| spellingShingle | Sarlin, Peter von Schweinitz, Gregor economic forecast economic policy economic recession Optimizing policymakers' loss functions in crisis prediction: before, within or after? |
| thumbnail | https://www.labourline.org/Image_prev.jpg?Archive=105346892352 |
| title | Optimizing policymakers' loss functions in crisis prediction: before, within or after? |
| topic | economic forecast economic policy economic recession |
| url | https://www.labourline.org/KENTIKA-753412457169-optimizing-policymakers-loss-f.htm |