An optimal early warning system for currency crises under modeluncertainty

Özet

This paper assesses several early warning (EWS) models offinancial crises to propose a model that canpredict the incidence of a currency crisis in developing countries. For this purpose, we employ the equalweighting (EW) and dynamic model averaging (DMA) approaches to combine forecast from individualmodels allowing for time-varying weights. Taking Egypt as a case study and focusing only on currencycrises, ourfindings show that combined forecast (EW- and DMA-based EWS), to account for uncertainty,perform better than other competing models in both in-sample and out-of-sample forecasts.