Predicting Emerging Market Currency Crashes
January 1, 2002
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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
Pages:
38
Volume:
2002
DOI:
Issue:
007
Series:
Working Paper No. 2002/007
Stock No:
WPIEA0072002
ISBN:
9781451842425
ISSN:
1018-5941
