Predicting Emerging Market Currency Crashes

Author/Editor:

W. R. M. Perraudin ; Manmohan S. Kumar ; Uma Moorthy

Publication Date:

January 1, 2002

Electronic Access:

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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.

Series:

Working Paper No. 2002/007

Subject:

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

English

Publication Date:

January 1, 2002

ISBN/ISSN:

9781451842425/1018-5941

Stock No:

WPIEA0072002

Pages:

38

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