Crises – with Applications to Southeast Asia

SSRN Electronic Journal, 2002

Journal of International Money and Finance, 1999

In recent years, a number of researchers have claimed success in systematically predicting which countries are more likely to suffer currency crises, most notably Kaminsky, . This paper evaluates the KLR approach to anticipating currency crises and develops and tests an alternative. First, we try to answer the question: if we had been using the KLR model in late 1996, how well armed would we have been to predict the Asia crisis? Second, we analyze a more general probit-based model of predicting currency crises. In the process, we test several basic assumptions underlying the indicators approach.

1999

This paper evaluates three models for predicting currency crises that were proposed before 1997. The idea is to answer the question: if we had been using these models in late 1996, how well armed would we have been to predict the Asian crisis? The results are mixed. Two of the models fail to provide useful forecasts. One model provides forecasts that are somewhat informative though still not reliable. Plausible modifications to this model improve its performance, providing some hope that future models may do better. This exercise suggests, though, that while forecasting models may help indicate vulnerability to crisis, the predictive power of even the best of them may be limited. [JEL F31, F47]

2009

This paper proposes a new statistical framework inherited from the traditional credit-scoring literature, to evaluate currency crises Early Warning System (EWS). Applied to evaluate for the predictive power of panel logit and Markov frameworks, it results that the panel logit is outperforming the Markov switching ones. Furthermore, the introduction of forward looking variables clearly improves the forecasting properties of the EWS. It thus confirms the adequacy of the second generation crisis models in explaining the occurrence of crises.

In recent years, the frequency of currency crises in developing countries seems to have increased. Moreover, the consequences of these financial crises have probably worsened, not only for the country concerned, but also for other countries in the region, due to increased international trade and capital flows. This has encouraged research on the prediction of currency crises. In this paper, this research is summarised and a new approach to modelling currency crises is proposed.

Emerging Markets Finance and Trade, 2010

This paper examines the probability of currency crises using a signal approach and a multivariate probit model. The results indicate that the signal approach can provide an effective warning system despite its nonparametric nature. The top three indicators that are useful in anticipating crises include international reserves, stock market indices, and GDP, respectively. Excess money balances and the ratio of domestic credit to GDP are significant and have positive correlation with the probability of a crisis. The growth rate of exports and the stock indices are significant and have a negative relationship with a crisis probability. Overall, the results indicate that government policies, the macroeconomic environment, and investor panic/self-fulfilling expectations all play a role in the making of a crisis.

Journal of Risk and Financial Management, 2022

In this study we develop an early warning system (EWS) to forecast currency crises in emerging countries in Asia and Latin America, using logit regression on monthly data from 1992 to 2011. We found that macroeconomic and institutional variables are valuable indicators for forecasting crises. Our results show that a low level of export growth, current account surplus/GDP, GDP growth, a high level of real exchange rate growth, import growth, and short-term debt/reserves can explain the advent of a possible currency crisis. We found that a poor law and order scenario and high external conflict can lead to a currency crisis. Additional findings include high government stability and the absence of internal conflict, which contribute to an absence of democracy, ultimately leading to a currency crisis. The policy-makers can consider taking the effective pre-emptive actions to prevent the currency crises occurring in the future.

International Journal of Forecasting, 2014

This paper introduces a new generation of Early Warning Systems (EWS) which takes into account dynamics within a system composed by binary variables. We elaborate on Kauppi and Saikonnen , which allows to consider several dynamic specifications and to use an exact maximum likelihood estimation method. Applied so as to predict currency crises for fifteen countries, this new EWS turns out to exhibit significantly better predictive abilities than the existing models both within and out of the sample.

Review of Middle East Economics and Finance, 2004

This paper explores the issue of constructing an economic predictive model of financial vulnerability through an alternative econometric methodology that addresses drawbacks in existing approaches. The methodology entails estimating a Markov regime switching model of exchange rate movements, with time-varying transition probabilities. Experiments with monthly and weekly models indicate that real exchange rate, foreign exchange reserves and domestic credit/deposit ratio are the most important determinants of financial vulnerability. These variables should be observed very closely by researchers and policy makers in order to determine if the country is heading for financially difficult times.