Financial crises and early warning systems: An application to Turkey (1988-2012)

The main purpose of this study is to analyze the predictability of the leading indicators of financial crises. For this purpose, in the study the concept of financial crisis, its causes and types are discussed in detail and leading indicators that can cause financial crises have been investigated. The methodologies for constructing early warning systems that help to predict financial crises have been described. This study covers the period from 1988 to 2012 in a monthly basis. The indicators being used for prediction of crisis have been analyzed by methods of signaling approach. A composite leading indicator model operated effectively has been developed by bringing together the indicators that are meaningful in terms of distribution of the signal. The model has led to conclusion that the following indicators should be considered: the real exchange rate, international reserves, M2 money multiplier, domestic credit volume, real interest rate and the ratio of credit interest rate/deposit interest rate. Thus, these results reveal that the model has an early warning capability to predict the crisis. Keywords: Financial Crises, Early Warning Systems, Leading Indicators, Signal Approach