Predicting Emerging Market Currency Crashes

By W. R. M. Perraudin, Manmohan S. Kumar, Uma Moorthy

January 1, 2002

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W. R. M. Perraudin, Manmohan S. Kumar, and Uma Moorthy. Predicting Emerging Market Currency Crashes, (USA: International Monetary Fund, 2002) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper assesses the extent to which crashes in emerging market currencies are predictable using simple logit models based on lagged macroeconomic and financial data. To evaluate our model, we calculate trading strategies in which an investor goes long or short in the currency depending on whether crash probabilities are low or high. When we estimate the model on part of the data and then use the parameter estimates to generate predictions for the remainder of the sample, we find that substantial profits may be made. Furthermore, the model correctly forecasts major crashes even on an out-of-sample basis.

Subject: Balance of payments, Central banks, Currencies, Depreciation, Foreign direct investment, Foreign exchange, International reserves, Money, National accounts, Real effective exchange rates

Keywords: Crash definition, Crisis definition, Currencies, Depreciation, Depreciation model, Emerging market, Emerging market crises, Exchange rates, Foreign direct investment, Foreign exchange, Global, International reserves, Real effective exchange rates, Trading strategies, Trading strategy, Unanticipated depreciation, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2002/007
Stock No:

WPIEA0072002
ISBN:

9781451842425
ISSN:

1018-5941

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