This MSPE is shown using different-sized data samples for estimation of the model, ranging from 20 days (one month) to 250,000 days (one millennium). When sample sizes are small, simpler models are unambiguously superior (Charts 12 to 13). With highly imperfect information, adding model complexity simply increases prediction errors. Indeed, in this hypothetical setup, for samples smaller than around two years, the simple model does better even than the true model. Simple does not just defeat complex; it trumps the truth. As the sample size expands, model uncertainty decreases and prediction errors fall. The performance of the complex models begins to improve relative to the simple ones. In general, prediction errors converge to a U-shaped pattern centred on the true model, with models which are either too simple or too complex inferior. This is a standard statistical finding. But it is only at sample sizes in excess of 100,000 days (400 years) that estimates of the “true” model outperform a much simpler one. Moreover, the simple model is only materially worse than complex models when the sample size rises to around 250,000 days (1,000 years). According to this experiment, the sample sizes which would be necessary for complex models to outperform much simpler ones are very large indeed. This experiment is only illustrative, as it is based on a hypothetical distribution. By drawing on actual financial market data, it is possible to assess more precisely the impact of model complexity and sample size on out-of-sample performance.
Nevertheless, efforts are made constantly for fulfilling the necessary legal framework and procedures, covering all possible directions of its activity. Simultaneously, there is worked in terms of organizing the structure, increasing the institution’s staff number and training. Emphasis is laid on the DIA’s cooperation with the Bank of Albania, the supervisory authority, so that the DIA carries out its functions effectively. At the same time, the relation with the Ministry of Finance is taken into consideration in organizing the Deposit Insurance Agency’s structure, so as to have the solid presence of the state in it. The forms of this cooperation are numerous, but all of them should be first consolidated under normal conditions of the banking system activity. The main elements of this cooperation are: •  Exchange of information on supervisory practices and observance of regulatory requirements by the insured entities;  •  Organization of joint trainings in getting acquainted with respective functions;  •  Acquaintance with and discussion on manuals and procedures requiring the commitment of both institutions in certain cases, and the testing of these procedures. The Bank of Albania and the Deposit Insurance Agency are working for enhancing this cooperation constantly. 2/3  A number of legal and regulatory alterations that are being prepared in parallel by both our institutions, and the exchange of information, as well as more frequent contacts between both institutions serve this purpose.